Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality

Posted: 13 Jun 2019

See all articles by Ralf Ewert

Ralf Ewert

University of Graz - Institute of Accounting and Auditing

Alfred Wagenhofer

University of Graz

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2019

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 (March 1, 2019). Journal of Accounting Research, Vol. 57, No. 1, 2019. Available at SSRN: https://ssrn.com/abstract=3396049

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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