Proactive Financial Reporting Enforcement: Audit Fee and Financial Reporting Quality Effects

The Accounting Review: March 2020, Vol. 95, No. 2, pp. 167-197. Doi.org/10.2308/accr-52497

56 Pages Posted: 7 Dec 2016 Last revised: 18 May 2020

See all articles by Annita Florou

Annita Florou

Bocconi University

Serena Morricone

SDA Bocconi

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Date Written: March 28, 2019

Abstract

We examine the costs and benefits of proactive financial reporting enforcement by the UK Financial Reporting Review Panel. Enforcement scrutiny is selective and varies by sector and over time, yet can be anticipated by auditors and companies. We find evidence that increased enforcement intensity leads to temporary increases in audit fees and more conservative accruals. However cross-sectional analysis across market segments reveals that audit fees increase primarily in the less-regulated AIM segment, and especially those AIM companies with a higher likelihood of financial distress and less stringent governance. On the contrary, less reliable operating asset-related accruals are more conservative in the Main segment, and in particular those Main companies with stronger incentives for higher financial reporting quality. Overall, our study indicates that financial reporting enforcement generates costs and benefits, but not always for the same companies.

Keywords: audit fees; financial reporting quality; financial reporting enforcement; Financial Reporting Review Panel

JEL Classification: K42, M41, M42, M48

Suggested Citation

Florou, Annita and Morricone, Serena and Pope, Peter F., Proactive Financial Reporting Enforcement: Audit Fee and Financial Reporting Quality Effects (March 28, 2019). The Accounting Review: March 2020, Vol. 95, No. 2, pp. 167-197. Doi.org/10.2308/accr-52497, Available at SSRN: https://ssrn.com/abstract=2878891 or http://dx.doi.org/10.2139/ssrn.2878891

Annita Florou

Bocconi University ( email )

Via Roentgen 1
Milan, 20136
Italy

HOME PAGE: http://faculty.unibocconi.eu/annitaflorou/

Serena Morricone

SDA Bocconi ( email )

Via Bocconi 8
Milan, Milan 20136
Italy

Peter F. Pope (Contact Author)

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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