The Costs of Waiving Audit Adjustments

• 成果类型: Article
• 署名作者: Choudhary, Preeti; Merkley, Kenneth; Schipper, Katherine
• 署名单位: University of Arizona; Indiana University System; Indiana University Bloomington; Duke University
• 刊物名称: JOURNAL OF ACCOUNTING RESEARCH
• ISSN/ISSBN: 0021-8456
• DOI: 10.1111/1475-679X.12453
• 发表日期: 2022
• 页码: 1813-1857
• 关键词: earnings management; BUSINESS RISK; client; fees; Negotiation; IMPACT; disposition; inherent; errors; pcaob

摘要

We analyze the disposition of auditor-proposed adjustments to financial statements. Our analyses address concerns, expressed by regulators and others, that auditors and their clients fixate on quantitative thresholds and overlook qualitative factors in assessing the materiality of discovered misstatements. Using a large sample of Public Company Accounting Oversight Board (PCAOB)-inspected audits, we examine the frequency with which management records versus waives auditor-proposed adjustments and whether waiving-proposed adjustments ha consequences for reporting reliability and the audit process. We find waived adjustments are linked to lower financial reporting quality measured by material misstatements, to incentives to meet/beat earnings targets, and to the audit process, as measured by higher next-period audit effort and fees and higher next-period proposed adjustments. These effects on the audit process are consistent with auditors responding to the increased risk associated with waived adjustments. In an exploratory analysis, we find that controlling for the amount of proposed adjustments, auditor resignations are negatively associated with waived adjustments.