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Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts
Contemporary accounting research, 2009-06, Vol.26 (2), p.517-548
[Peer Reviewed Journal]
2009 Canadian Academic Accounting Association ;ISSN: 0823-9150 ;EISSN: 1911-3846 ;DOI: 10.1506/car.26.2.8
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Title:
Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts
Author:
Davis, Larry R.
;
Soo, Billy S.
;
Trompeter, Gregory M.
Subjects:
Accruals
;
Auditing
;
Business accounting
;
Corporate finance
;
Earnings
;
Financial accounting
;
Financial analysis
;
Sarbanes-Oxley Act
;
U.S.A
Is Part Of:
Contemporary accounting research, 2009-06, Vol.26 (2), p.517-548
Description:
ABSTRACT IN ENGLISH: We examine the relation between auditor tenure and a firm's ability to use discretionary accruals to meet or beat analysts' earnings forecasts. We find evidence over the period 1988-2006 that firms with both short and long tenure are more likely to report levels of discretionary accruals that allow them to meet or beat earnings forecasts. These results suggest that while regulatory mandates for periodic auditor turnover have negative effects, sustained long-term auditor-client relationships may also be detrimental to audit quality. Further, although we observe a positive relation between tenure and the use of discretionary accruals to meet or beat earnings in the pre-Sarbanes-Oxley (SOX) period, we do not observe such a relation in the post-SOX period. This latter finding is consistent with regulatory reforms and heightened scrutiny of financial reporting in the post-SOX period resulting in less aggressive efforts at managing earnings by client firms and/or increased diligence on the part of auditors. These findings may not generalize to firms that are not covered by analysts, because these firms do not face the same public pressure to manage earnings in order to meet or beat expectations. // ABSTRACT IN FRENCH: Les auteurs examinent la relation entre la durée du mandat de l'auditeur et la capacité de l'entreprise de recourir aux ajustements discrétionnaires pour atteindre ou dépasser les prévisions de résultats des analystes. Les auteurs constatent que, durant la période 1988-2006, les entreprises sont davantage susceptibles de faire état de niveaux d'ajustements discrétionnaires leur permettant d'atteindre ou de dépasser les prévisions de résultats, peu importe la durée du mandat de leurs auditeurs. Ces constatations semblent indiquer que, même si l'obligation réglementaire de rotation périodique des auditeurs a des répercussions négatives, le maintien de relations prolongées entre auditeur et client peut aussi être préjudiciable à la qualité de l'audit. En outre, bien que les auteurs observent une relation positive entre la durée du mandat et le recours aux ajustements discrétionnaires pour atteindre ou dépasser les prévisions de résultats au cours de la période antérieure à l'adoption de la loi Sarbanes-Oxley (SOX, 1988-2001), ils ne relèvent pas ce genre de relation au cours de la période postérieure à la SOX. Cette dernière constatation est en concordance avec les réformes réglementaires et la surveillance accrue de l'information financière dans la période postérieure à la SOX, des mesures qui ont freiné les efforts de gestion du résultat déployés par les entreprises clientes et (ou) accru la diligence des auditeurs. Il est possible que ces constatations ne puissent pas être généralisées aux entreprises auxquelles ne s'intéressent pas les analystes, car elles ne sont pas soumises aux mêmes pressions du public pour gérer le résultat afin d'atteindre ou de dépasser les attentes.
Publisher:
Oxford, UK: Blackwell Publishing Ltd
Language:
English
Identifier:
ISSN: 0823-9150
EISSN: 1911-3846
DOI: 10.1506/car.26.2.8
Source:
Alma/SFX Local Collection
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