Auditor Conservatism and Quarterly Earnings

57 Pages Posted: 3 May 2014

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Lee-Seok Hwang

Seoul National University - College of Business Administration

Ching-Lih Jan

California State University, East Bay

Date Written: April 2002

Abstract

Auditors’ legal liability incentives to be conservative cause fourth quarter earnings to differ systematically from interim quarter earnings. We show that the frequencies and average magnitudes of losses, negative extraordinary items, negative special items and negative discontinued operations are highest in the fourth quarter. We show that earnings is more timely in recognizing bad news in the fourth quarter than in earlier quarters, and this greater timeliness for bad news is largely accomplished through operating accruals. Our conservatism measures are higher in periods of high auditor liability exposure consistent with auditors being more conservative when exposed to greater legal liability.

Keywords: Quarterly earnings; Earnings-return relation; Negative returns

JEL Classification: M41, D21, D82, G14, G38, K41, N20

Suggested Citation

Basu, Sudipta and Hwang, Lee-Seok and Jan, Ching-Lih, Auditor Conservatism and Quarterly Earnings (April 2002). Available at SSRN: https://ssrn.com/abstract=2428862 or http://dx.doi.org/10.2139/ssrn.2428862

Sudipta Basu (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Lee-Seok Hwang

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Ching-Lih Jan

California State University, East Bay ( email )

25800 Carlos Bee Boulevard
Hayward, CA 94542
United States

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