Trust and Financial Reporting Quality

Posted: 16 Nov 2014

See all articles by Jace Garrett

Jace Garrett

Clemson University

Rani Hoitash

Bentley University - Department of Accountancy

Douglas F. Prawitt

Brigham Young University

Date Written: November 14, 2014

Abstract

Using unique survey data from Great Place to Work® Institute, we investigate the association of intra-organizational trust (i.e., employees’ trust in management) with three aspects of financial reporting: accruals quality, misstatements, and internal control quality. We find that trust is associated with better accrual quality, lower likelihood of financial statement misstatements, and lower likelihood of internal control material weakness disclosures. However, these effects are not uniform across all companies. Consistent with trust improving financial reporting quality through improved information production and information sharing, we find that trust is significantly associated with financial reporting quality in relatively decentralized firms, but not in firms that are relatively centralized. Our results are robust to several analyses that attempt to control for potential alternative explanations.

Keywords: Trust; Information Sharing; Accruals; Internal Control; Misstatements

JEL Classification: M41

Suggested Citation

Garrett, Jace and Hoitash, Rani and Prawitt, Douglas F., Trust and Financial Reporting Quality (November 14, 2014). Journal of Accounting Research, Vol. 52, No. 5, 2014. Available at SSRN: https://ssrn.com/abstract=2524493

Jace Garrett

Clemson University ( email )

Clemson, SC 29631
United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Douglas F. Prawitt (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-2351 (Phone)

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