Do Quarterly and Annual Financial Statements Reflect Similar Financial Statement Error in the Post-SOX Era?

Abstract

ABSTRACT The U.S. has invested substantial resources into the regulation and oversight of public-company financial reporting. While these investments should incentivize high-quality reporting among quarterly and annual financial statements, the sharp rise in public company auditor oversight may disproportionately benefit annual reports given the fiscal year-centric nature of audits. We compare the within company-year difference in financial statement error between quarterly and annual financial reports and examine how any difference changed following SOX. We find that pre-SOX error is lower for audited financial statements than for reviewed financial statements and that this difference increases following SOX. Additional tests suggest that elevated auditor oversight, rather than managerial incentives, is the impetus for the change. Despite regulatory investment designed to incentivize the production of high-quality quarterly and annual financial statements, the post-SOX difference in error between quarterly and annual financial statements appears to have increased. Data Availability: Data are available from public sources cited in the text. JEL Classifications: M41; M42.