The Interrelation between Audit Quality and Managerial Reporting Choices and Its Effects on Financial Reporting Quality

• In Event: Conflicts of Interest, Fraud & Audit Quality

Abstract

This paper examines a model of auditing, managerial reporting bias, and market reactions to earnings reports to determine the influence of the manager and the auditor on financial reporting quality. Our purpose is to synthesize the financial reporting and strategic auditing literatures to provide conceptual guidance that can help empiricists disentangle audit quality from a firm’s innate characteristics. To that end, we focus on providing a linear equilibrium that can be directly applied to empirical research. Our results provide a testable theory of how institutional characteristics in the audit and financial reporting environments interact to affect the conduct of the audit, the expected reporting bias, and stock market reactions to earnings reports.

Authors

• Evelyn R Patterson, Indiana University - Indianapolis

• Reed Smith, Indiana University - Indianapolis