Does Voluntary Disclosure of Projected Financial Information Influence Auditors’ Evaluation of That Information?

• In Event: Auditor Response to Managers' Motives

Abstract

Prior research documents that investors and analysts typically interpret voluntarily disclosed information to be credible because releasing biased information is costly to the manager. In this study, we investigate the joint influence of two factors (whether the projected financial information is voluntarily disclosed and the forecast optimism) on auditors’ skeptical beliefs related to audits of complex estimates. Based on psychology theory related to source credibility, we argue that auditors performing audits of complex estimates will be more skeptical of audit evidence that has been voluntarily disclosed because they have less trust in client management, even when the forecasted information is less optimistic. In addition, we predict that auditors are skeptical of forecasts containing higher optimism, regardless of voluntary disclosure. Results of an experiment asking 89 practicing auditors to evaluate a real-world goodwill impairment case are consistent with our expectations. Specifically, we find that auditors are least skeptical when projected financial information is not disclosed and less optimistic compared to all other conditions. Further, as predicted, participants’ management trust judgments mediate the joint effect voluntary disclosure and forecast optimism have on professional skepticism. Collectively, our results highlight important considerations related to audits of complex estimates.

Authors

• Kamber Vittori Hetrick, Northeastern University

• Sean Hillison, Virginia Tech