Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality

62 Pages Posted: 28 Jul 2016 Last revised: 18 Nov 2018

See all articles by Ralf Ewert

Ralf Ewert

University of Graz - Institute of Accounting and Auditing

Alfred Wagenhofer

University of Graz

Date Written: November 17, 2018

Abstract

A widely held assumption in policy making and empirical research is that increasing the strength of public enforcement improves financial reporting quality and audit quality. This paper provides a more nuanced view. In a model with a manager who can manage earnings, a strategic auditor, and an enforcement institution, we show that enforcement and auditing are complements in a weak enforcement regime but can be substitutes in a strong regime. Although stronger enforcement always mitigates earnings management, the effects of different instruments of strengthening enforcement are ambiguous. We show that they can improve or impair financial reporting quality and audit quality, depending on production risk, accounting system characteristics, and the scope of auditing relative to enforcement.

Keywords: Earnings Management, Enforcement, Auditing, Financial Reporting Quality, Audit Quality

JEL Classification: G38, M41, M42, M48

Suggested Citation

Ewert, Ralf and Wagenhofer, Alfred, Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality (November 17, 2018). Available at SSRN: https://ssrn.com/abstract=2815002 or http://dx.doi.org/10.2139/ssrn.2815002

Ralf Ewert (Contact Author)

University of Graz - Institute of Accounting and Auditing ( email )

Universitaetsstr. 15/F1
Graz, A-8010
Austria
+43 (0) 316 380-3470 (Phone)
+43 (0) 316 380-9540 (Fax)

HOME PAGE: http://www.uni-graz.at/iuwp/

Alfred Wagenhofer

University of Graz ( email )

Austria
+43 316 380 3500 (Phone)
+43 316 380 9565 (Fax)

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