Trust and Financial Reporting Quality

Jace Garrett

Clemson University

Rani Hoitash

Bentley University - Department of Accountancy

Douglas F. Prawitt

Brigham Young University

September 4, 2014

Journal of Accounting Research, Forthcoming

Using unique survey data from Great Place to Work® Institute, we investigate the association of intra-organizational trust (i.e., employees’ trust in management) with three aspects of financial reporting: accruals quality, misstatements, and internal control quality. We find that trust is associated with better accrual quality, lower likelihood of financial statement misstatements, and lower likelihood of internal control material weakness disclosures. However, these effects are not uniform across all companies. Consistent with trust improving financial reporting quality through improved information production and information sharing, we find that trust is significantly associated with financial reporting quality in relatively decentralized firms, but not in firms that are relatively centralized. Our results are robust to several analyses that attempt to control for potential alternative explanations.

Number of Pages in PDF File: 52

Keywords: Trust; Information Sharing; Accruals; Internal Control; Misstatements

JEL Classification: M41

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Date posted: August 29, 2012 ; Last revised: September 5, 2014

Suggested Citation

Garrett, Jace and Hoitash, Rani and Prawitt, Douglas F., Trust and Financial Reporting Quality (September 4, 2014). Journal of Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2137957 or http://dx.doi.org/10.2139/ssrn.2137957

Contact Information

Jace Garrett
Clemson University ( email )
Clemson, SC 29631
United States
Rani Hoitash (Contact Author)
Bentley University - Department of Accountancy ( email )
175 Forest Street
Waltham, MA 02452-4705
United States
Douglas F. Prawitt
Brigham Young University ( email )
Provo, UT 84602
United States
801-422-2351 (Phone)
801-422-0621 (Fax)
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