An Investigation of Auditors’ Judgments When Companies Release Earnings Before Audit Completion

Posted: 24 Jun 2019

See all articles by Lori Shefchik Bhaskar

Lori Shefchik Bhaskar

Indiana University - Kelley School of Business - Department of Accounting

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting

Date Written: May 1, 2019

Abstract

The majority of U.S. public companies release annual earnings prior to the completion of audit fieldwork. We investigate this phenomenon in a controlled experiment with audit partners and senior managers. We find that releasing earnings before completion of the audit pressures auditors to adopt the goals of management, thereby reducing the likelihood of post‐announcement audit‐adjustment recommendations. We also examine the effect of audit committee (AC) strength in improving auditors’ judgments after annual earnings are released. When ACs are actively involved in accounting issues and proactively communicating with auditors — characteristics currently lacking in most ACs — the negative effects on auditors’ judgments are completely mitigated. Our study provides evidence on potential unintended consequences of early release of earnings and the importance of investing in high‐quality ACs to mitigate adverse effects of client pressures on audit judgment and financial reporting quality.

Keywords: auditor judgment; audit committees; audit completeness; directional goals; earnings announcements; financial reporting quality

JEL Classification: D80; D91; G10; G30; M40; M41; M42

Suggested Citation

Bhaskar, Lori Shefchik and Hopkins, Patrick E. and Schroeder, Joseph H., An Investigation of Auditors’ Judgments When Companies Release Earnings Before Audit Completion (May 1, 2019). Journal of Accounting Research, Vol. 57, No. 2, 2019. Available at SSRN: https://ssrn.com/abstract=3406261

Lori Shefchik Bhaskar (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting ( email )

Kelley School of Business
1309 E. 10th Street
Bloomington, IN 47405
United States
812-855 2617 (Phone)
812-855 8679 (Fax)

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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