Verification Procedures and Financial Reporting Quality: The Positive Effects of Negative Assurance Reviews
Date: Wednesday, 14 March 2018
Time: 2.15 pm to 3.45 pm
Venue: Executive Seminar Room 5 (S3.1-B1-07)
Abstract
Do limited-verification financial statement reviews improve financial reporting quality (FRQ) and are reviews cost beneficial? The answers are important for assessing the relative effectiveness of reviews, which are limited to primarily analytical procedures and inquiries, and audits that also require tests of internal control and verification of details. Using data from private companies whose financial statements are compiled, reviewed, or audited, we calculate four objective and commonly applied FRQ proxies. We find that both reviews and audits yield significantly higher FRQ scores than compilations, but review and audit scores are statistically indistinguishable for three of our four measures. However, we find that audits are associated with lower cost of debt than reviews, suggesting there may be audit benefits that objective FRQ measures do not capture. Further, in limited subsample analyses we find that, relative to compiled financial statements, reviews yield between 55% and 80% of the lower cost of debt associated with an audit, but only 35% to 40% of the added fees. Overall, our results suggest that reviews may be a high-quality, cost-effective verification alternative to audits.
About the Speaker
Professor William Kinney (PhD Michigan State, 1968) has taught accounting and auditing at Oklahoma State, Iowa, Michigan, INSEAD, Northwestern, and Texas, where he is the Charles and Elizabeth Prothro Regents Chair in Business (emeritus). He has written more than 70 articles in top tier scholarly accounting journals. He has received three Wildman Awards and the Notable Contribution to the Accounting Literature Award as well as Outstanding Accounting Educator from the American Accounting Association, Outstanding Auditing Educator from the Auditing Section, and in 2014, he was elected to the Accounting Hall of Fame. Professor Kinney service includes managing editor of The Accounting Review, twenty-five years on the editorial board of the Journal of Accounting Research, and memberships on the AICPA’s Auditing Standards Board, the FASB’s Financial Accounting Standards Advisory Council, and the PCAOB’s Advisory Council. From 2007-12, he was a member of the International Auditing and Assurance Standards Board.
For further information and enquiries, please contact Adeline Tang at amytang@ntu.edu