Abstract

http://ssrn.com/abstract=692864
 
 

References (54)



 
 

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Recognition v. Disclosure and Auditor Misstatement Correction: The Cases of Stock Compensation and Leases


Robert Libby


Cornell University - Samuel Curtis Johnson Graduate School of Management

Mark W. Nelson


Cornell University - Samuel Curtis Johnson Graduate School of Management

James E. Hunton


Bentley University - Department of Accountancy; Erasmus University

March 23, 2005


Abstract:     
We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed as opposed to recognized amounts. In both a stock-compensation and leasing setting, audit partners require greater correction of misstatements in recognized amounts than in equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they face greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability. These results have implications for the interpretation of prior research on the reliability of recognized and disclosed numbers, for financial-accounting standard setters who may want to consider the reliability effects of their recognition versus disclosure decisions, and for auditing standard setters who may wish to clarify auditors' responsibilities for preventing misstatements in disclosed amounts.

Number of Pages in PDF File: 42

Keywords: recognition, disclosure, reliability, stock options, leases, auditing

JEL Classification: M41, M45, M49, J33

working papers series


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Date posted: April 14, 2005  

Suggested Citation

Libby, Robert and Nelson, Mark W. and Hunton, James E., Recognition v. Disclosure and Auditor Misstatement Correction: The Cases of Stock Compensation and Leases (March 23, 2005). Available at SSRN: http://ssrn.com/abstract=692864 or http://dx.doi.org/10.2139/ssrn.692864

Contact Information

Robert Libby (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-255-3348 (Phone)
607-254-4590 (Fax)
Mark W. Nelson
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
448 Sage Hall
Ithaca, NY 14853
United States
607-255-6323 (Phone)
607-254-4590 (Fax)
James E. Hunton
Bentley University - Department of Accountancy ( email )
175 Forest Street
Waltham, MA 02452
United States
Erasmus University
Rotterdam
Netherlands
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