An Incomplete Audit at the Earnings Announcement: Implications for Financial Reporting Quality and the Market’s Response to Earnings

55 Pages Posted: 21 Dec 2013 Last revised: 5 Dec 2018

See all articles by Nathan T. Marshall

Nathan T. Marshall

University of Colorado at Boulder - Department of Accounting

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting

Teri Lombardi Yohn

Emory University Goizueta Business School

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Date Written: May 3, 2018

Abstract

There has been a substantial increase, since 2004, in the number of firms that announce annual earnings before audit completion as opposed to after audit completion. In this study, we argue that earnings announced before audit completion are associated with lower financial reporting quality and investor perceptions that earnings are more likely to be overstated. Consistent with this expectation, we document that the market places more (less) weight on good (bad) earnings news for earnings announced after audit completion relative to earnings announced before audit completion. We continue to find this differential market response when we expand the returns window to include the 10-K filing date, suggesting that the differential response is not driven by investors’ temporary concerns about earnings revisions between the earnings announcement and the 10-K filing date or by differential GAAP disclosures in the earnings announcement, as suggested in prior research. Finally, as a direct test of financial reporting quality, we show that earnings announced with a completed audit are less likely to be restated in the future, are less likely to meet or beat expectations, and are associated with fewer income-increasing discretionary accruals than those announced with an incomplete audit.

Keywords: audit completeness; earnings announcement; market reliance; financial reporting quality

Suggested Citation

Marshall, Nathan T. and Schroeder, Joseph H. and Yohn, Teri Lombardi, An Incomplete Audit at the Earnings Announcement: Implications for Financial Reporting Quality and the Market’s Response to Earnings (May 3, 2018). Kelley School of Business Research Paper No. 2014-38, Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2370048 or http://dx.doi.org/10.2139/ssrn.2370048

Nathan T. Marshall

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Joseph H. Schroeder (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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