Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/wly/coacre/v16y1999i1p135-165.html
   My bibliography  Save this article

Accounting Accruals and Auditor Reporting Conservatism

Author

Listed:
  • JERE R. FRANCIS
  • JAGAN KRISHNAN
Abstract
Accounting accruals are managers' subjective estimates of future outcomes and cannot, by definition, be objectively verified by auditors prior to occurrence. This causes audits of high†accrual firms to pose more uncertainty than audits of low†accrual firms because of potential estimation error and a greater chance that high†accrual firms have undetected asset realization and/or going concern problems that are related to the high level of accruals. One way that auditors can compensate for this risk exposure is to lower their threshold for issuing modified audit reports, an action that will increase modified reports and, therefore, lessen the likelihood of failing to issue a modified report when appropriate. We call this auditor reporting conservatism and test if high†accrual firms in the United States, are more likely to receive modified audit reports for asset realization uncertainties and going concern problems. Empirical results for a large sample of U.S. publicly listed companies support the hypothesis that auditors are more conservative, that is, more likely to issue both types of modified audit reports for high†accrual firms. Further analyses show that income†increasing accruals are somewhat more likely to result in reporting conservatism than income†decreasing accruals, and that only the Big Six group of auditors show evidence of reporting conservatism. These findings add to our understanding of the audit report formation process and the potentially important role played by accounting accruals in that process.

Suggested Citation

  • Jere R. Francis & Jagan Krishnan, 1999. "Accounting Accruals and Auditor Reporting Conservatism," Contemporary Accounting Research, John Wiley & Sons, vol. 16(1), pages 135-165, March.
    • Handle: RePEc:wly:coacre:v:16:y:1999:i:1:p:135-165
    DOI: 10.1111/j.1911-3846.1999.tb00577.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1911-3846.1999.tb00577.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1911-3846.1999.tb00577.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Lynda Thoman, 1996. "Legal Damages and Auditor Efforts," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 275-306, March.
    2. Mutchler, JF & Hopwood, W & McKeown, JM, 1997. "The influence of contrary information and mitigating factors on audit opinion decisions on bankrupt companies," Journal of Accounting Research, Wiley Blackwell, vol. 35(2), pages 295-310.
    3. K. Raghunandan, 1993. "Predictive Ability of Audit Qualifications for Loss Contingencies," Contemporary Accounting Research, John Wiley & Sons, vol. 9(2), pages 612-634, March.
    4. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    5. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    6. Bell, Tb & Tabor, Rh, 1991. "Empirical-Analysis Of Audit Uncertainty Qualifications," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 350-370.
    7. Mutchler, Jf, 1985. "A Multivariate-Analysis Of The Auditors Going-Concern Opinion Decision," Journal of Accounting Research, Wiley Blackwell, vol. 23(2), pages 668-682.
    8. Kinney, WR & Nelson, MW, 1996. "Outcome information and the ''expectation gap'': The case of loss contingencies," Journal of Accounting Research, Wiley Blackwell, vol. 34(2), pages 281-299.
    9. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    10. Feroz, Eh & Park, K & Pastena, Vs, 1991. "The Financial And Market Effects Of The Secs Accounting And Auditing Enforcement Releases," Journal of Accounting Research, Wiley Blackwell, vol. 29, pages 107-142.
    11. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    12. Zmijewski, Me, 1984. "Methodological Issues Related To The Estimation Of Financial Distress Prediction Models," Journal of Accounting Research, Wiley Blackwell, vol. 22, pages 59-82.
    13. Ettredge, M & Greenberg, R, 1990. "Determinants Of Fee Cutting On Initial Audit Engagements," Journal of Accounting Research, Wiley Blackwell, vol. 28(1), pages 198-210.
    14. Connie L. Becker & Mark L. Defond & James Jiambalvo & K.R. Subramanyam, 1998. "The Effect of Audit Quality on Earnings Management," Contemporary Accounting Research, John Wiley & Sons, vol. 15(1), pages 1-24, March.
    15. Carcello, Jv & Palmrose, Zv, 1994. "Auditor Litigation And Modified Reporting On Bankrupt Clients," Journal of Accounting Research, Wiley Blackwell, vol. 32, pages 1-30.
    16. Lys, T & Watts, Rl, 1994. "Lawsuits Against Auditors," Journal of Accounting Research, Wiley Blackwell, vol. 32, pages 65-93.
    17. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    18. Gary Entwistle & Daryl Lindsay, 1994. "An Archival Study of the Existence, Cause, and Discovery of Income†Affecting Financial Statement Misstatements," Contemporary Accounting Research, John Wiley & Sons, vol. 11(1), pages 271-296, June.
    19. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    2. Johnson, Marilyn F. & Nelson, Karen K. & Frankel, Richard M., 2002. "The Relation Between Auditor's Fees for Non-audit Services and Earnings Quality," Research Papers 1696r, Stanford University, Graduate School of Business.
    3. Jorge Farinha & Luis Filipe Viana, 2006. "Board structure and modified audit opinions: the case of the Portuguese Stock Exchange," CEF.UP Working Papers 0609, Universidade do Porto, Faculdade de Economia do Porto.
    4. Francis, Jere R., 2004. "What do we know about audit quality?," The British Accounting Review, Elsevier, vol. 36(4), pages 345-368.
    5. Bartov, Eli & Gul, Ferdinand A. & Tsui, J.S.L.Judy S. L., 2000. "Discretionary-accruals models and audit qualifications," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 421-452, December.
    6. Mary Jane Lenard & Pervaiz Alam & David Booth & Gregory Madey, 2001. "Decision‐making capabilities of a hybrid system applied to the auditor's going‐concern assessment," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 10(1), pages 1-23, March.
    7. Stuart, Iris & Shin, Yong-Chul & Cram, Donald P. & Karan, Vijay, 2013. "Review of choice-based, matched, and other stratified sample studies in auditing research," Journal of Accounting Literature, Elsevier, vol. 32(1), pages 88-113.
    8. Connie L. Becker & Mark L. Defond & James Jiambalvo & K.R. Subramanyam, 1998. "The Effect of Audit Quality on Earnings Management," Contemporary Accounting Research, John Wiley & Sons, vol. 15(1), pages 1-24, March.
    9. Josep Garcia-Blandon & Josep Maria Argilés-Bosch & Monica Martinez-Blasco & David Castillo Merino, 2018. "On the relationship between compliance with recommendations on the audit committee of codes of good practices and financial reporting quality," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(4), pages 921-946, December.
    10. Oz, Ibrahim Onur & Yelkenci, Tezer, 2018. "Examination of real and accrual earnings management: A cross-country analysis of legal origin under IFRS," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 24-37.
    11. Mei Feng & Chan Li, 2014. "Are Auditors Professionally Skeptical? Evidence from Auditors’ Going‐Concern Opinions and Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 52(5), pages 1061-1085, December.
    12. Thomas A. Lee & Robert W. Ingram & Thomas P. Howard, 1999. "The Difference between Earnings and Operating Cash Flow as an Indicator of Financial Reporting Fraud," Contemporary Accounting Research, John Wiley & Sons, vol. 16(4), pages 749-786, December.
    13. Reynolds, J. Kenneth & Francis, Jere R., 2000. "Does size matter? The influence of large clients on office-level auditor reporting decisions," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 375-400, December.
    14. Sarowar Hossain & Larelle Chapple & Gary S. Monroe, 2018. "Does auditor gender affect issuing going‐concern decisions for financially distressed clients?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(4), pages 1027-1061, December.
    15. Geiger, Marshall A. & Basioudis, Ilias G. & DeLange, Paul, 2022. "The effect of non-audit fees and industry specialization on the prevalence and accuracy of auditor’s going-concern reporting decisions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 47(C).
    16. Kwang Wuk Oh & Seok Woo Jeong & Seon Mi Kim & Seung Weon Yoo, 2017. "The Effect of IPO Risks on Auditors’ Decisions: Auditor Designation Case," Australian Accounting Review, CPA Australia, vol. 27(4), pages 421-441, December.
    17. Karl E. Hackenbrack & Chris E. Hogan, 2002. "Market Response to Earnings Surprises Conditional on Reasons for an Auditor Change," Contemporary Accounting Research, John Wiley & Sons, vol. 19(2), pages 195-223, June.
    18. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    19. Cormier, Denis & Martinez, Isabelle, 2006. "The association between management earnings forecasts, earnings management, and stock market valuation: Evidence from French IPOs," The International Journal of Accounting, Elsevier, vol. 41(3), pages 209-236.
    20. Bruynseels, Liesbeth & Willekens, Marleen, 2012. "The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies," Accounting, Organizations and Society, Elsevier, vol. 37(4), pages 223-241.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:coacre:v:16:y:1999:i:1:p:135-165. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1911-3846 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.