An Investigation of Auditors' Judgments when Companies Release Earnings before Audit Completion

• In Event: Factors affecting auditor judgment

Abstract

Over two-thirds of public companies now announce earnings prior to (versus with, or after) audit completion. We expect this practice has potential to increase pressure in auditor/client negotiations over post-announcement audit adjustments. We report results of a controlled experiment with audit partners and senior managers that indicates auditors are significantly less likely to require audit adjustments for aggressive financial reporting when earnings have been released (versus drafted). Further, we test and find this effect can be fully mitigated with strong audit committee effectiveness (i.e., including idealistic, but achievable, characteristics that are likely currently lacking in average committees) or with higher auditor professional identification. Our process-model tests suggest released earnings causes auditors to adopt directional goals to avoid adjustments, leading to biased decision processing and lower judgment quality. Our study provides evidence on the importance of high-quality auditors and audit committees in promoting high-quality financial reporting.

Authors

• Lori Shefchik Bhaskar, Indiana University - Bloomington

• Patrick E Hopkins, Indiana University - Bloomington

• Joseph H Schroeder, Indiana University - Bloomington