The Costs of Waiving Audit Adjustments

Preeti Choudhary, Kenneth Merkley, Katherine Schipper

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We analyze the disposition of auditor-proposed adjustments to financial statements. Our analyses address concerns, expressed by regulators and others, that auditors and their clients fixate on quantitative thresholds and overlook qualitative factors in assessing the materiality of discovered misstatements. Using a large sample of Public Company Accounting Oversight Board (PCAOB)-inspected audits, we examine the frequency with which management records versus waives auditor-proposed adjustments and whether waiving-proposed adjustments ha consequences for reporting reliability and the audit process. We find waived adjustments are linked to lower financial reporting quality measured by material misstatements, to incentives to meet/beat earnings targets, and to the audit process, as measured by higher next-period audit effort and fees and higher next-period proposed adjustments. These effects on the audit process are consistent with auditors responding to the increased risk associated with waived adjustments. In an exploratory analysis, we find that controlling for the amount of proposed adjustments, auditor resignations are negatively associated with waived adjustments.

Original languageEnglish (US)
Pages (from-to)1813-1857
Number of pages45
JournalJournal of Accounting Research
Volume60
Issue number5
DOIs
StatePublished - Dec 2022

Keywords

  • audit adjustments
  • audit effort
  • audit fees
  • financial reporting reliability
  • recorded adjustments
  • restatements
  • waived adjustments

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'The Costs of Waiving Audit Adjustments'. Together they form a unique fingerprint.

Cite this