Business Strategy, Financial Reporting Irregularities, and Audit Effort

Posted: 29 Mar 2012  

Kathleen A. Bentley-Goode

The University of New South Wales (UNSW) - School of Accounting

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Nathan Y. Sharp

Texas A&M University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2012

Abstract

This study examines whether clients’ business strategies are a factor in determining the occurrence of financial reporting irregularities and the level of audit effort. We use the organizational strategy theory of Miles and Snow (1978, 2003) to develop a comprehensive measure of business strategy using publicly available data. We find that Miles and Snow’s Prospector strategy is more likely to be involved in financial reporting irregularities and generally requires greater audit effort. The business strategy measure also appears to capture client business risk and provides incremental explanatory power beyond the individual measures of client complexity or risk used in traditional audit fee models. We contribute to the literature by constructing a replicable business strategy measure and identifying organizational business strategy as an important ex ante determinant of financial reporting irregularities and levels of audit effort. Our results suggest that investigating how audits can be improved to reduce financial reporting irregularities among Prospector clients is an important area for audit practice and future research.

Keywords: audit effort, audit fees, business strategy, financial reporting irregularities

JEL Classification: D21, L21, L22, M40, M42

Suggested Citation

Bentley-Goode, Kathleen A. and Omer, Thomas C. and Sharp, Nathan Y., Business Strategy, Financial Reporting Irregularities, and Audit Effort (March 26, 2012). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2029070

Kathleen Ann Bentley Goode

The University of New South Wales (UNSW) - School of Accounting ( email )

Sydney, NSW 2052
Australia
+61 2 9385 6930 (Phone)
+61 2 9385 5925 (Fax)

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Nathan Y. Sharp (Contact Author)

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

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