Audit Implications of Non-GAAP Reporting

59 Pages Posted: 16 Aug 2017 Last revised: 24 Mar 2022

See all articles by Nicholas Hallman

Nicholas Hallman

University of Texas at Austin

Jaime J. Schmidt

University of Texas at Austin

Anne Thompson

University of Illinois at Urbana-Champaign

Date Written: March 22, 2022

Abstract

We investigate whether non-GAAP reporting affects the audit process and thereby the quality of the related financial statements. First, we provide evidence that auditors in numerous countries, including the U.S. and the U.K, rely to varying degrees on non-GAAP profit before tax as a benchmark for determining quantitative materiality. Then, using Premium Listed companies on the London Stock Exchange, we document that U.K. auditor reliance on non-GAAP materiality benchmarks often results in a higher quantitative materiality amount and can lower audit quality. Although U.K. auditors appear skeptical of managers’ more aggressive non-GAAP adjustments, auditors adopt more of management’s low-quality adjustments when auditor independence is weaker. In sum, our results suggest that non-GAAP reporting can indirectly affect investors by reducing the rigor of the financial statement audit.

Keywords: non-GAAP earnings, auditor materiality, audit quality, auditor retention/turnover

JEL Classification: M40, M41, M42, M48, N20

Suggested Citation

Hallman, Nicholas and Schmidt, Jaime J. and Thompson, Anne, Audit Implications of Non-GAAP Reporting (March 22, 2022). Available at SSRN: https://ssrn.com/abstract=3018823 or http://dx.doi.org/10.2139/ssrn.3018823

Nicholas Hallman

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Jaime J. Schmidt (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

Anne Thompson

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

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