Browsing by Subject "discretionary accruals"
Now showing 1 - 2 of 2
Results Per Page
Sort Options
Item A New Era for the Big 8? Evidence on the Association Between Earnings Quality and Audit Firm Type(2010-07-14) Cassell, Cory A.I examine the association between earnings quality and audit firm type using a three-tiered audit firm classification scheme which allows for an explicit examination of the quality of Second-Tier audited earnings. My tests are motivated by the lack of competition in the market for audit services, theoretical arguments which suggest a positive association between audit firm size and audit quality, evidence pointing to the rapid post-Andersen growth in Second-Tier audit practices, and the lack of empirical research that fully differentiates audit firm type. My results indicate that the post-Andersen growth of Second-Tier audit firms coincides with improved Second-Tier audit quality, relative to the other audit firm types (Big N and other non-Big N). Specifically, the results indicate that Second-Tier client earnings quality was not distinct from that of other non-Big N clients in the pre-Andersen period. However, in the post-Andersen period, the results indicate that Second-Tier client earnings quality was higher than that of other non-Big N clients. Moreover, the post-Andersen results provide partial evidence suggesting that there is no difference in Second-Tier and Big N client earnings quality and, thus, lend some credence to the notion of a new era for the Big 8. These results convey important information to market participants (e.g., investors, underwriters, analysts, etc.) who wish to assess the extent to which financial statements are likely to be free from opportunistic managerial manipulation, to clients that are contemplating switching to a Second-Tier audit firm, to government agencies who have expressed concern over the state of competition in the market for audit services, and to those who have promoted the use of Second-Tier audit firms in the wake of SOX-related resource constraints.Item Financial Statement Misstatements, Auditor Litigation, and Subsequent Auditor Behavior(2010-07-14) Schmidt, Jaime J.This paper examines the occurrence and outcome of auditor litigation related to financial statement misstatements and the effect of auditor misstatement-based litigation on subsequent auditor behavior. The study is motivated by recent calls to limit auditor legal liability and the need to examine the ability of litigation to deter non-Generally Accepted Accounting Principles (GAAP) financial reporting. I find that misstatement severity is the primary driver of auditor litigation. Specifically, I find that auditor misstatement-based litigation is more likely when the misstatement is associated with fraud, a regulatory investigation, a larger stock price decline, and/or a greater number of accounting application [i.e., Financial Accounting Standards Board (FASB)/GAAP) failures. In addition, I find that auditor misstatement-based litigation is more likely to occur when the misstatement is associated with engagement fees that consist of a greater magnitude or a greater proportion of non-audit service fees. Further, I find that misstatement severity and the size of the plaintiffs? claims are the primary drivers of auditor settlements resulting from misstatement-based litigation. Specifically, I find that an auditor settlement resulting from misstatement-based litigation is more likely to occur when the misstatement is associated with fraud, a greater amount of alleged income or equity inflation over the class action time period, and/or a larger alleged percentage drop in share price over the class action time period. With respect to subsequent auditor behavior, I find evidence that auditor litigation results in more conservative subsequent auditor behavior across a litigated auditor?s office-wide client portfolio (that excludes the litigated client). Specifically, in the year following auditor litigation, I find evidence that litigation results in increased auditor constraint of client-reported positive and signed discretionary accruals, as well as longer audit report lags.