Users' Judgments of Managers and Auditors: The Impact of Accounting Treatment and Reconciliation

46 Pages Posted: 10 Sep 2007

See all articles by Susan D. Krische

Susan D. Krische

American University - Kogod School of Business

Paula R. Sanders

University of Illinois at Urbana-Champaign

Steven D. Smith

Brigham Young University

Date Written: September 2007

Abstract

We examine how accounting disclosures affect users' assessments of management credibility and, in turn, their expectations of the auditor. In a lease obligation setting, our experiment separates the effects of understanding the financial impact of accounting treatment (by manipulating the presence of a supplemental reconciliation from disclosure to recognition) from inferences made based on management's choice of accounting disclosures (by manipulating the source of the reconciliation). Users who receive a reconciliation report lower management credibility, higher investment risk, and higher audit expectations when the reconciliation is provided by a source other than management. By documenting boundary conditions in which audit expectations are higher for disclosed information, we extend research on the influence of reporting discretion to audit expectations, with implications for the expectation gap and auditors' potential business risk.

Keywords: management credibility, perceived audit quality, expectation gap, recognition, disclosure, disaggregation, reconciliation

JEL Classification: M41, M45, M49, D89

Suggested Citation

Krische, Susan D. and Sanders, Paula R. and Smith, Steven D., Users' Judgments of Managers and Auditors: The Impact of Accounting Treatment and Reconciliation (September 2007). Available at SSRN: https://ssrn.com/abstract=1013097 or http://dx.doi.org/10.2139/ssrn.1013097

Susan D. Krische (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States
202-885-2082 (Phone)
202-885-1992 (Fax)

Paula R. Sanders

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-6412 (Phone)

Steven D. Smith

Brigham Young University ( email )

531 TNRB
Provo, UT 84602
United States
801-422-1969 (Phone)

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