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Auditor Conservatism and Audit Quality: Evidence from IPO Earnings Forecasts

35 Pages Posted: 28 Jan 2002  

Philip J. Lee

University of Sydney

Sarah J. Taylor

University of Melbourne - Faculty of Business and Economics

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

We examine the relation between the accuracy and bias of earnings forecasts provided in Australian initial public offering (IPO) prospectuses and a proxy for differential audit quality. For the period we examine, most Australian IPO prospectuses include an earnings forecast, with which the auditor must be satisfied prior to signing off on the prospectus. Our evidence suggests that forecasts associated with Big 6 auditors are more accurate than those for which a Non-Big 6 auditor is used, although this result is not robust across alternative measures of forecast accuracy. We also find significantly less optimistic bias for forecasts associated with Big 6 auditors, but this result is robust to alternative measures of forecast bias. Although the distribution of forecast errors is strongly suggestive of earnings management to avoid reporting earnings below the forecast figure, the distribution of forecast errors for Non-Big 6 clients indicates a substantially greater proportion of large, optimistic forecast errors than for Big 6 clients. This supports our conclusion that Big 6 auditors are more conservative than their Non-Big 6 counterparts.

Keywords: Audit quality; Initial public offering; Management earnings forecasts

JEL Classification: G32, G12, G29, M41, M43, M49

Suggested Citation

Lee, Philip J. and Taylor, Sarah J. and Taylor, Stephen L., Auditor Conservatism and Audit Quality: Evidence from IPO Earnings Forecasts (January 2002). Available at SSRN: https://ssrn.com/abstract=297825 or http://dx.doi.org/10.2139/ssrn.297825

Philip John Lee

University of Sydney ( email )

Discipline of Accounting
Faculty of Economics and Business (H69)
Sydney NSW 2006
Australia
+61 2 9351 3067 (Phone)
+61 2 9351 6638 (Fax)

HOME PAGE: http://www.econ.usyd.edu.au/staff/philipl

Sarah J. Taylor (Contact Author)

University of Melbourne - Faculty of Business and Economics ( email )

Victoria, 3010
Australia
+61383443414 (Phone)
+61393492397 (Fax)

Stephen L. Taylor

University of Technology Sydney ( email )

UTS Business School
PO Box 123 Broadway
Sydney, NSW 2007
Australia
61295143437 (Phone)
61295143513 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7 UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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