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http://ssrn.com/abstract=1705726
 
 

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Business Strategy, Financial Reporting Irregularities, and Audit Effort


Kathleen A. Bentley


The University of New South Wales (UNSW) - School of Accounting

Thomas C. Omer


University of Nebraska at Lincoln - School of Accountancy

Nathan Y. Sharp


Texas A&M University - Department of Accounting

March 2, 2012


Abstract:     
This study examines whether clients’ business strategies are a factor in determining the occurrence of financial reporting irregularities and the level of audit effort. We use the organizational strategy theory of Miles and Snow (1978, 2003) to develop a comprehensive measure of business strategy using publicly available data. We find that Miles and Snow’s Prospector strategy is more likely to be involved in financial reporting irregularities and generally requires greater audit effort. The business strategy measure also appears to capture client business risk and provides incremental explanatory power beyond the individual measures of client complexity or risk used in traditional audit fee models. We contribute to the literature by constructing a replicable business strategy measure and identifying organizational business strategy as an important ex ante determinant of financial reporting irregularities and levels of audit effort. Our results suggest that investigating how audits can be improved to reduce financial reporting irregularities among Prospector clients is an important area for audit practice and future research.

Number of Pages in PDF File: 61

Keywords: Audit Effort, Audit Fees, Business Strategy, Financial Reporting Irregularities

JEL Classification: D21, L21, L22, M40, M42

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Date posted: November 8, 2010 ; Last revised: March 4, 2012

Suggested Citation

Bentley, Kathleen A. and Omer, Thomas C. and Sharp, Nathan Y., Business Strategy, Financial Reporting Irregularities, and Audit Effort (March 2, 2012). Available at SSRN: http://ssrn.com/abstract=1705726 or http://dx.doi.org/10.2139/ssrn.1705726

Contact Information

Kathleen A. Bentley (Contact Author)
The University of New South Wales (UNSW) - School of Accounting ( email )
Sydney, NSW 2052
Australia
+61 2 9385 6930 (Phone)
+61 2 9385 5925 (Fax)
Thomas C. Omer
University of Nebraska at Lincoln - School of Accountancy ( email )
307 College of Business Administration
Lincoln, NE 68588-0488
United States
Nathan Y. Sharp
Texas A&M University (TAMU) - Department of Accounting ( email )
430 Wehner
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

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