The Impact of Changes in the Reporting Environment on the Disposition of Proposed Audit Adjustments

42 Pages Posted: 2 Jan 2009

See all articles by Jennifer R. Joe

Jennifer R. Joe

University of Delaware - Accounting & MIS

Arnold Wright

Northeastern University - Accounting Group

Sally Wright

University of Massachusetts at Boston

Date Written: September 2008

Abstract

We present evidence on the resolution of proposed audit adjustments during a unique period of time immediately following several US financial scandals and surrounding the passage of the Sarbanes-Oxley Act (SOX). During this period auditors and clients both faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, annual inspections and a new external regulator (i.e., the PCAOB). In comparison with prior studies we also consider a broader range of factors potentially impacting the resolution of proposed adjustments including the affect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find a dramatic reduction in the proportion of waived audit adjustments when compared to prior studies, suggesting calls for greater auditor and client responsibilities increased conservatism. Results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although there is no pattern of favoring such clients. We also find that adjustments are more likely to be waived for clients with stronger internal controls, especially larger clients, and for repeat adjustments. Overall, the results suggest that there is increased conservatism in the resolution of proposed adjustments.

Keywords: Proposed adjustments, waiving audit adjustments, post-SOX audits, auditor-client

JEL Classification: M49, G38, G34, M41, M44

Suggested Citation

Joe, Jennifer R. and Wright, Arnold and Wright, Sally, The Impact of Changes in the Reporting Environment on the Disposition of Proposed Audit Adjustments (September 2008). Northeastern U. College of Business Administration Research Paper No. 08-006, Available at SSRN: https://ssrn.com/abstract=1322531 or http://dx.doi.org/10.2139/ssrn.1322531

Jennifer R. Joe (Contact Author)

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Arnold Wright

Northeastern University - Accounting Group ( email )

406 Hayden Hall
United States

Sally Wright

University of Massachusetts at Boston ( email )

Boston, MA 02125
United States
617-287-7682 (Phone)
617-265-7173 (Fax)

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