The Impact of Auditor Behavior and Audit Committee Questioning on Non-GAAP Reporting Decisions

• In Event: Audit and advisory effects on investors and managers

Abstract

While external auditors’ contentious or cooperative behavior during discussions over subjective GAAP reporting choices can influence management’s GAAP reporting decisions, this behavior may also impact managers’ subsequent non-GAAP reporting. Additionally, recent calls for audit committees to go beyond GAAP and question non-GAAP disclosures may impact non-GAAP reporting. We experimentally examine if contentious or cooperative auditor behavior and audit committee questioning influence managers’ non-GAAP disclosure choices. Senior executives are less likely to make non-GAAP earnings exclusions, and present non-GAAP earnings less prominently earlier in the earnings release, when the auditor is contentious during GAAP discussions and/or when an audit committee questions both GAAP and non-GAAP disclosures. Auditor contentiousness likely enhances subsequent disclosure hesitancy, while anticipated non-GAAP questioning generates more thorough disclosure analysis, both curbing non-GAAP reporting. Managers select more aggressive non-GAAP reporting choices only absent both auditor contention and active audit committee questioning of non-GAAP financials. Thus, certain governance mechanisms can individually and jointly curb aggressive non-GAAP reporting.

Authors

• Sudip Bhattacharjee, Virginia Polytechnic Institute and State University

• Kevin Hale, University of North Carolina Wilmington