Regulatory Changes: Unexpected Consequences for Non-Accelerated Filers.

• In Event: GAAP, Accounting Numbers, and Stock Returns

Abstract

New regulations implemented by the SEC in 2003 and 2004 simultaneously shortened the financial statement filing deadlines and increased the required preparation time for both the financial statements and the related audit. These new regulations were intended to improve the quality and timeliness of financial reporting, and likely did for the companies that were subject to the regulations, accelerated filers (AFs). However, there were negative unintended consequences for companies not subject to the regulations, namely non-accelerated filers (NAFs), smaller publicly traded companies making up a significant portion of all public companies. We propose and find evidence to support the theory that the new regulations imposed strains on auditor resources requiring them to make resource allocation decisions that negatively affected NAFs. NAFs with an auditor who had a high proportion of accelerated filer clients (AFs) had longer audit delays after the regulations were implemented than NAFs of an auditor with a low proportion of AF clients. Further, we find that NAFs and/or their auditors make strategic choices as a result of these resource constraints; NAFs with a high-proportion AF auditor are more likely to change auditors than NAFs with a low-proportion AF auditor. Finally, this strategy appears to be successful as NAFs changing to a lower-AF proportion auditor have shorter audit delays after the auditor change, and they experience a larger improvement in audit timeliness as compared to NAFs changing to a higher-AF proportion audit office.

Authors

• Bei Dong, University of South Florida

• Stefanie Tate, University of Massachusetts Lowell

• Le Xu, University of New Hampshire