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    Understanding the Relation between Financial Reporting...
    research summary posted January 17, 2017 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.07 Attempts to Measure Audit Quality, 11.08 Proxies for Audit Quality 
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    Title:
    Understanding the Relation between Financial Reporting Quality and Audit Quality
    Practical Implications:

    These findings imply that recognizing the relation between financial reporting quality and audit quality and the observability of differing outcomes can provide greater insight into the interpretation of research findings. They also suggest that greater consideration of how changing and differing economic situations affect financial reporting and audit outcomes will provide deeper insight into the determinants and consequences of both audit quality and financial reporting quality. Finally, recognizing and controlling for the potential endogeneity can lead to greater insights into both financial reporting quality and audit quality. The authors also provide a framework for identifying potential areas for future research. 

    Citation:

    Gaynor, L. M., A. S. Keaton, M. Mercer and T. L. Yohn. 2016. Understanding the Relation between Financial Reporting Quality and Audit Quality. Auditing: A Journal of Practice and Theory 35 (4): 1 – 22. 

    Keywords:
    financial reporting quality, audit quality, quality proxies, and quality determinants.
    Purpose of the Study:

    Understanding the determinants of high quality reporting is an important goal of both auditing and financial accounting research. These two areas share many related issues; however, the research within each area tends to draw on prior research within that area. This exclusion has created a pressing need for a review of each stream of literature, with a special focus on how the areas of research intersect and relate to each other. This paper attempts to bridge the gap between the financial reporting quality and audit quality literatures.

    Design/Method/ Approach:

    The authors begin by developing definitions of financial reporting quality and audit quality that are grounded the authoritative literature. Next, they link the new definitions to the operational measures of these constructs used in financial reporting and audit quality research. With this understanding, the authors create a person/task/environment framework for conceptualizing the determinants of financial reporting and audit quality. 

    Findings:
    • The authors find that both audit quality and financial reporting quality literatures often underplay the distinction between pre-audit financial reporting quality and audit quality and use the same metric as a proxy for either financial reporting or audit.
    • The authors find that financial reporting quality and audit quality are often inseparable in terms of observable financial reporting outcomes in archival research.
    • The authors find that both financial reporting quality and audit quality are heavily influenced by the underlying economics of the business.
    • The authors find that financial reporting quality and audit quality are often endogenously determined. 
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Attempts to Measure Audit Quality, Proxies for Audit Quality