Complementarity between Audited Financial Reporting and Voluntary Disclosure: The Case of Former Andersen Clients

49 Pages Posted: 28 Jun 2017 Last revised: 12 Apr 2021

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Alon Kalay

Michigan State University - Eli Broad College of Business

Gil Sadka

University of Texas at Dallas

Yuan Zou

Harvard University - Business School (HBS)

Date Written: January 15, 2021

Abstract

Prior literature presents various perspectives on the role of financial reporting. One view is that
mandatory periodic reporting disciplines managers and encourages timely voluntary disclosure.
We examine this “confirmation hypothesis” using the shock to financial-reporting quality
experienced by Arthur Andersen clients forced to switch auditors. Consistent with the confirmation
hypothesis, we find that former Andersen clients increase disclosure after they change auditors.
They increase forecasting frequency and enhance forecasting precision and specificity. We present
additional cross-sectional evidence that shows Arthur Andersen clients with larger increases in
financial-reporting quality increased their disclosure by relatively more, even within the sample of
Arthur Andersen clients. We supplement our main findings with a battery of tests to reduce the
possibility that alternative shocks and uncertainty drive our results. Our findings support
complementarity between financial-reporting quality and voluntary disclosures.

Suggested Citation

Frankel, Richard M. and Kalay, Alon and Sadka, Gil and Zou, Yuan, Complementarity between Audited Financial Reporting and Voluntary Disclosure: The Case of Former Andersen Clients (January 15, 2021). Available at SSRN: https://ssrn.com/abstract=2993440

Richard M. Frankel

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Alon Kalay (Contact Author)

Michigan State University - Eli Broad College of Business

632 Bogue St
East Lansing, MI 48824
United States

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Yuan Zou

Harvard University - Business School (HBS)

Soldiers Field Road
Morgan 362
Boston, MA 02163
United States

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