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Article
Publication date: 20 June 2022

Essam Elshafie

This study aims to examine the effect of reducing disclosure and auditing requirements on audit quality, auditor effort and auditor conservatism. The Jumpstart Our Business…

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Abstract

Purpose

This study aims to examine the effect of reducing disclosure and auditing requirements on audit quality, auditor effort and auditor conservatism. The Jumpstart Our Business Startups (JOBS) Act of 2012 is used as a setting for this research. The JOBS Act aimed to boost economic growth by easing emerging growth companies’ (EGCs) access to capital markets. The Act provides scaled disclosure and auditing provisions and exemptions for EGCs.

Design/methodology/approach

Using data from Capital IQ, CRSP and Audit Analytics on EGCs and matching non-EGCs between 2012 and 2018, this study assesses the effect of such reduced disclosure and audit requirements on audit quality, auditor effort and auditor conservatism.

Findings

The findings denote that while audit quality and auditor effort are lower for EGCs, auditor conservatism is not different for EGCs as compared to non-EGCs.

Originality/value

This study expands the current research by providing evidence on the impact of reduced reporting and auditing requirements on auditor conservatism and audit quality, in addition to auditor effort in EGC engagements.

Details

Accounting Research Journal, vol. 35 no. 6
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 18 April 2023

Essam Elshafie

This study aims to address the following four research questions: first, whether auditors report critical audit matters (CAMs) to shield themselves against possible litigation;…

616

Abstract

Purpose

This study aims to address the following four research questions: first, whether auditors report critical audit matters (CAMs) to shield themselves against possible litigation; second, whether reporting quality affects auditors’ propensity to report CAMs; third, whether auditors’ tenure length – reflecting familiarity with clients’ financial reporting – affects their likelihood to report CAMs; and fourth, whether auditors’ conservatism increases the likelihood of CAMs reporting.

Design/methodology/approach

Data are manually collected from audit reports including CAMs in 10-K, then financial data are collected from the Capital IQ database, and market data are collected from the CRSP database. Using propensity score matching, the initial sample of companies with CAMs is matched with companies without reported CAMs. Performance adjusted discretionary accruals, real earnings management proxy, Khan and Watts’ (2009) C-score, propensity to issue a going concern opinion, Dechow et al.’s (2011) F-Score, Rogers and Stocken’s (2005) model and Houston et al.’s (2010) model are used to measure reporting quality, auditor conservatism, misstatement risk and litigation risk, respectively.

Findings

The results do not show that auditors report CAMs opportunistically to shield themselves from litigation risk. However, the results do suggest that auditors have a greater tendency to report CAMs when reporting quality is low and when they are more conservative. On the other hand, they have less tendency to report CAMs in their first year of engagement.

Research limitations/implications

The findings of this study have important implications for the auditor behavior literature as it shows that, when it comes to reporting CAMs, auditors actually behave objectively and do not report in a trite way. This study also provides early archival evidence on a standard that relates to the first major change to the auditor’s report in decades. To the best of the author’s knowledge, it is the first to provide evidence on the association between auditor conservatism and auditors tendency to report CAMs and the first to triangulate prior research on auditor litigation risk by providing the first archival evidence on the auditors “litigation-shielding” concern.

Practical implications

This study examines whether auditors attempt to meet the stated objective of reporting CAMs by signaling information about reporting quality. This study demonstrates that reporting CAMs is not a “boilerplate” communication. This study has implications for standards setters, as it shows that CAMs are reported in a way consistent with the objectives of the new standard, namely, via signaling information in the audit report on the quality of the financial statements.

Originality/value

In terms of originality, this paper uses a manually collected sample and, to the best of the author’s knowledge, is the first to focus on auditor’s behavior rather than on investors or clients reactions to CAMs. Also, this paper addresses a recently issued standard using US data and archival approach, rather than experimental. This paper also provides relevant evidence related to concerns raised earlier but were not empirically examined, such as reporting CAMS as “boilerplate” expectations. This paper provides new evidence on the auditors’ behavior with regard to litigation risk.

Details

Review of Accounting and Finance, vol. 22 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 18 May 2010

Essam Elshafie, Ai‐Ru Yen and Minna Yu

The purpose of this paper is to examine the association between investor perception management through reporting aggressive pro forma (PF) earnings and earnings management through…

1985

Abstract

Purpose

The purpose of this paper is to examine the association between investor perception management through reporting aggressive pro forma (PF) earnings and earnings management through real activities or by manipulating accruals.

Design/methodology/approach

A sample of PF earnings announcements over 2001‐2007 was manually collected from Lexis Nexis, consisting of 4,285 firm‐quarter observations; the aggressiveness of PF earnings reporting was measured by the difference between GAAP earnings and PF earnings.

Findings

The paper finds that managers report more aggressively calculated PF earnings numbers if they do not meet their earnings targets or they have limited abilities to manage earnings. Also it was found that the gap between the value relevance of GAAP earnings and PF earnings is smaller for firms with relatively low level of discretionary accruals; this gap is decreased in the post‐Sarbanes Oxley Act period.

Practical implications

This paper has implications for investors and financial analysts by explaining firms' PF earnings reporting behaviours. It also has policy implications for capital market regulators regarding the PF earnings reporting rules.

Originality/value

This paper is the first study to provide evidence that the opportunistic reporting of PF earnings is associated with managerial inability to meet earnings targets through earnings management. It advances our understanding on the PF earnings reporting behaviour.

Details

Review of Accounting and Finance, vol. 9 no. 2
Type: Research Article
ISSN: 1475-7702

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Book part
Publication date: 20 January 2010

Richard A. Bernardi and David F. Bean

This research is a 6-year extension of Bernardi's (2005) initial ranking of the top ethics authors in accounting; it also represents a broadening of the scope of the original data…

Abstract

This research is a 6-year extension of Bernardi's (2005) initial ranking of the top ethics authors in accounting; it also represents a broadening of the scope of the original data into accounting's top-40 journals. While Bernardi only considered publications in business-ethics journals in his initial ranking, we developed a methodology to identify ethics articles in accounting's top-40 journals. The purpose of this research is to provide a more complete list of accounting's ethics authors for use by authors, administrators, and other stakeholders. In this study, 26 business-ethics and accounting's top-40 journals were analyzed for a 23-year period between 1986 through 2008. Our data indicate that 16.8 percent of the 4,680 colleagues with either a PhD or DBA who teach accounting at North American institutions had authored/coauthored one ethics article and only 6.3 percent had authored/coauthored more than one ethics article in the 66 journals we examined. Consequently, 83.2 percent of the PhDs and DBAs in accounting had not authored/coauthored even one ethics article.

Details

Research on Professional Responsibility and Ethics in Accounting
Type: Book
ISBN: 978-1-84950-722-6

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