Mandatory disclosure of auditor contracting and financial reporting quality: Initial evidence

Author:

Bowler Blake D.1ORCID,Carnes Robert R.2ORCID,Park Hyun Jong3ORCID

Affiliation:

1. Mercer University Macon Georgia USA

2. University of Florida Gainesville Florida USA

3. Temple University Philadelphia Pennsylvania USA

Abstract

Regulation requires US public companies to disclose the pre‐approval status of their year‐end auditors in their annual proxy statements. Although auditor–client relationships remain at will, the disclosure mandate requires companies to publicly announce their intentions to retain their current auditors. In this paper, we provide initial evidence of the potential implications that these disclosures may have on financial reporting quality. We find that when the disclosures occur later relative to the release of interim reports, interim filings exhibit lower reporting quality. After performing robustness tests, we explore two possible mechanisms that could explain our findings. First, we consider the possibility that audit committee members compromise their independence. Second, we investigate whether auditors delay the performance of certain interim procedures while the disclosures are pending. With the use of audit committee equity compensation to measure audit committee independence impairment and audit fees to measure auditor effort, we find evidence consistent with both explanations.

Funder

Fox School of Business, Temple University

Publisher

Wiley

Subject

General Economics, Econometrics and Finance,Accounting

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