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An Investigation of Auditors’ Judgments When Companies Release Earnings Before Audit Completion
Author(s) -
BHASKAR LORI SHEFCHIK,
HOPKINS PATRICK E.,
SCHROEDER JOSEPH H.
Publication year - 2019
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12262
Subject(s) - audit , accounting , earnings , business , earnings management , unintended consequences , earnings quality , joint audit , audit evidence , quality audit , audit committee , walk through test , internal audit , accrual , political science , law
The majority of U.S. public companies release annual earnings prior to the completion of audit fieldwork. We investigate this phenomenon in a controlled experiment with audit partners and senior managers. We find that releasing earnings before completion of the audit pressures auditors to adopt the goals of management, thereby reducing the likelihood of post‐announcement audit‐adjustment recommendations. We also examine the effect of audit committee (AC) strength in improving auditors’ judgments after annual earnings are released. When ACs are actively involved in accounting issues and proactively communicating with auditors—characteristics currently lacking in most ACs—the negative effects on auditors’ judgments are completely mitigated. Our study provides evidence on potential unintended consequences of early release of earnings and the importance of investing in high‐quality ACs to mitigate adverse effects of client pressures on audit judgment and financial reporting quality.