Users' Judgments of Managers and Auditors: The Impact of Accounting Treatment and Reconciliation
46 Pages Posted: 10 Sep 2007
Date Written: September 2007
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: Suggested Citation