Qualitative audit materiality and earnings management

• 成果类型: Article
• 署名作者: Legoria, Joseph; Melendrez, Kevin D.; Reynolds, J. Kenneth
• 署名单位: Louisiana State University System; Louisiana State University; New Mexico State University; State University System of Florida; Florida State University
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-012-9218-3
• 发表日期: 2013
• 页码: 414-442
• 关键词: sarbanes-oxley act; ANALYSTS FORECASTS; TEMPORAL ANALYSIS; Share prices; tax expense; thresholds; judgments; surprises; expectations; incentives

摘要

This study investigates auditors' propensity to rely on quantitative materiality thresholds to the exclusion of qualitative materiality thresholds. Specifically, we examine whether auditors are more likely to allow earnings management that is less than typical quantitative materiality thresholds but that nonetheless is qualitatively material. We use changes in tax expense as a proxy for earnings management. Our results indicate that companies with pre-managed earnings that would have missed the consensus analyst forecast are more likely to decrease their tax expense when the magnitude of the decrease is less than quantitative audit materiality thresholds. The results also indicate that firms are more likely to meet or beat the forecast when the amount of earnings management necessary to meet the analyst forecast is less than quantitative materiality. These results are consistent with auditors relying on quantitative materiality thresholds to the exclusion of qualitative materiality thresholds, i.e., the importance of meeting or beating the analyst forecast. Finally, we find that the ability to use tax expense reduction within quantitative materiality to meet or beat analysts' consensus forecasts was significantly reduced by the SEC's guidance on materiality in SAB-99 and by the passage of the Sarbanes-Oxley Act.