5,057 research outputs found

    Audit Quality And Accrual Reliability: Evidence From The Korean Stock Market

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    This study empirically investigates whether a high-quality audit improves the reliability of the components of total accruals using earnings persistence and cash flow predictability. I find that, for firms audited by Big Four auditors, their current or noncurrent assets-related accruals, which are less reliable (“more subjective in measurement”), lead to higher earnings persistence and future cash flow predictability than those of firms audited by non-Big Four auditors. These results suggest that high-quality auditors more effectively evaluate the reasonableness of accrual measurement based on more sufficient and appropriate audit evidence, leading to enhanced accrual reliability

    Managerial Ability And The Effectiveness Of Internal Control Over Financial Reporting

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    Able managers are considered more likely to produce high quality earnings, as suggested by earlier studies in related fields. Considering a positive association between earnings quality and effectiveness of internal control over financial reporting, I investigate the association between the latter, and managerial ability. As a result, I find that managerial ability is negatively associated with the existence of material weakness(es) in internal control over financial reporting. This result suggests that able managers are more likely to establish and maintain effective internal control over financial reporting, which helps them better monitor their firms' financial reporting

    CEO Overconfidence And The Effectiveness Of Internal Control Over Financial Reporting

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    In this study, I investigate the association between overconfidence, a cognitive bias of chief executive officers (CEOs), and the existence of internal control weaknesses (ICWs). As suggested in the prior finance literature on the negative impact of CEO overconfidence on corporate policy, overconfident CEOs could disregard the importance of internal control over financial reporting (ICFR), which could negatively affect the firm’s investment for infrastructure to implement effective financial reporting information system (FRIS) and result in less reliable financial information. Empirical test results show that CEO overconfidence is positively associated with the existence of ICWs, particularly with ICWs related to insufficient accounting personnel or ineffective FRIS. Those ICWs subsequently lead to lower earnings quality, higher absolute value of discretionary accruals and lower quality of accruals. Furthermore, potentially negative consequences of CEO overconfidence to the effectiveness of ICFR could downgrade investors’ confidence in the credibility of financial statements

    The Effect Of Accrual Reliability On Audit Pricing

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    This study investigates how accrual reliability is associated with audit fees. Since the enactment of the Sarbanes-Oxley Act of 2002, financial reporting has shifted toward a more principles-based accounting paradigm, along with an emphasis on fair value accounting by standard setters. As a result, auditors are exposed to more subjective accrual estimation processes, including accounting estimates. In the current financial reporting environment, external auditors are required to pay greater attention to accrual components that are largely based on accounting estimates to evaluate the reasonableness of accrual measurements. In this study, we find a negative association between the level of accrual reliability and audit fees. That is, the greater the potential litigation risk (due to accrual components based on more subjective or less reliable estimation processes), the more the audit work, and the higher the fees paid to external auditors

    Managerial Overconfidence And Going-Concern Modified Audit Opinion Decisions

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    We examine how auditors perceive managerial overconfidence during audit reporting by testing the relationship between managerial overconfidence and the likelihood of issuing a first-time going-concern modified audit opinion to financially distressed firms. After controlling for the factors affecting auditor’s going-concern modified audit opinion decision, we find that the likelihood of issuing a first-time going-concern modified audit opinion is positively associated with managerial overconfidence, suggesting that auditors adversely value overconfident management in financially distressed firms and thus tend to issue a first-time going-concern modified audit opinion to them. We also find that the positive association above is reinforced with capital market uncertainty
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