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    The Impact of Audit Completeness and Quality on Earnings...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 14.0 Corporate Matters, 14.08 Press Release Language and Signaling 
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    Title:
    The Impact of Audit Completeness and Quality on Earnings Announcement GAAP Disclosures.
    Practical Implications:

    The results of this study are important for regulators when considering the potential impact of the timeliness of audits and the subsequent impact on capital markets. The focus of the PCAOB is to improve the quality of public company audits and to ensure higher quality financial reporting for all stakeholders. However, higher quality audits may come at the cost of less timely financial information. This study indicates that this in turn can influence firm voluntary disclosure behavior. Consequently, this result could have potentially negative consequences for investors seeking the timeliest information possible.

    Citation:

    Schroeder, J. H. 2016. The Impact of Audit Completeness and Quality on Earnings Announcement GAAP Disclosures. The Accounting Review 91 (2): 677-705.

    Keywords:
    audit completeness, audit quality, earnings announcement, PCAOB standards, GAAP disclosures
    Purpose of the Study:

    Annual earnings announcements are important disclosures that public companies provide investors. Prior research indicates that earnings announcements are more informative to investors when the disclosures contain more detailed GAAP disclosure information. This is consistent with best practices supplied by regulators and practitioners which strongly encourage companies to include in their annual earnings announcements more detailed GAAP financial statement information.

    Due to its informativeness, most companies release their annual earnings announcement in advance of the completed year-end audit. However, regulators and practitioners recommend that companies not only include the external auditor in the earnings announcement disclosure review process, but also wait until the audit is complete or substantially complete prior to releasing the earnings announcement. This situation creates the possibility that audit completeness and auditor quality influence the firms disclosure behavior related to the annual earnings announcement. In spite of stated best practices, companies face strong market demand pressures to release more timely information, and existing regulatory requirements do not require auditor oversight before releasing this information. Thus, the extent to which audit completeness and audit quality influence the level of GAAP information included in annual earnings announcement disclosures remains unclear. Below are two primary objectives addressed by the author:

    • Examines whether the level of completeness of the audit on the date of the annual earnings announcement influences the level of GAAP information provided in the disclosure. Management may be more willing to disclose additional GAAP information when there is a more complete audit as of the earnings announcement date because management may have greater confidence in the underlying financial statement balances.
    • Examines whether the quality of the audit influences the level of GAAP information provide in the disclosure. Management may be more willing to disclose additional GAAP information when a higher quality audit is performed because management may have a higher level of confidence in the accuracy of the financial reporting system.
    Design/Method/ Approach:

    The author uses data on publicly traded U.S. firms from the years 2001-2011 to examine how the level of completeness of the audit, as well as audit quality influences the amount of GAAP financial information included in annual earnings announcements which occur in advance of the audit completion date. The level of audit completeness was calculated as the difference between the annual earnings announcement date and the audit report date. Audit quality was measured as either the level of audit fees paid by the company, or whether the firm engaged a Big 4 auditor.

    Findings:
    • Annual earnings announcements for firms in which the audit is closer to completion include higher levels of GAAP financial information as part of the disclosure.
    • Annual earnings announcements for firms in which the audit is of a higher quality include higher levels of GAAP financial information as part of the disclosure. These results indicate that management is more likely to provide more detailed earnings announcement GAAP disclosures when the annual audit is more complete or when the external auditor is higher quality.
    • The increase in disclosed GAAP information for firms with more complete audits or audits from higher quality auditors is driven primarily by an increase in disclosure related to balance sheet and cash flow statement information
    Category:
    Corporate Matters, Standard Setting
    Sub-category:
    Impact of PCAOB, Press Release Language & Signaling