Reporting Bias with an Audit Committee

Posted: 11 Jan 2009 Last revised: 23 Apr 2010

See all articles by Judson Caskey

Judson Caskey

University of California, Los Angeles (UCLA) - Accounting Area

Venky Nagar

University of Michigan, Stephen M. Ross School of Business

Paolo Petacchi

Georgetown University - Robert Emmett McDonough School of Business

Abstract

This study models a manager who privately reports earnings to an independent audit committee that, after its own due diligence, modifies the report for public release to investors. The audit committee alters the reporting and valuation dynamics by attempting to remove the manager’s reporting bias, but then presents the information it has collected with its own bias. The audit committee’s presence changes the impact of penalties and incentives on reporting, valuation, and due diligence activities. For example, increasing penalties can sometimes degrade the reporting process. Our simultaneous consideration of the manager, audit committee, and investors provides a new framework for reporting and valuation, and sheds light on empirical earnings quality research that has largely studied the management and audit effects separately.

Keywords: audit committee, bias, disclosure, reporting discretion, Sarbanes-Oxley

JEL Classification: G14, G34, K22, M41, M43, M49

Suggested Citation

Caskey, Judson and Nagar, Venky and Petacchi, Paolo, Reporting Bias with an Audit Committee. Accounting Review, Vol. 85, No. 2, pp. 447-481, 2010. Available at SSRN: https://ssrn.com/abstract=1323796

Judson Caskey (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://sites.google.com/site/judsoncaskey/

Venky Nagar

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-3292 (Phone)
734-764-3146 (Fax)

Paolo Petacchi

Georgetown University - Robert Emmett McDonough School of Business ( email )

37th and O Streets, NW
Washington, DC 20057
United States

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