Accounting Policy Changes and Misstatement Risk
48 Pages Posted: 29 Jan 2021
Date Written: December 9, 2020
We examine how various types of accounting policy changes affect financial misstatement risk and the ways auditors mitigate that risk. We find greater misstatement risk for both idiosyncratic and industry-wide accounting policy changes and that auditors play an important role in mitigating these risks in some situations but not others. Higher quality auditors appear to mitigate the misstatement risk from industry-wide changes, but not idiosyncratic changes. Misstatement risk is also mitigated when auditors communicate accounting policy changes through explanatory paragraphs and preferability letters and when they identify material weaknesses. Our evidence suggests that accounting policy changes are associated with a heightened risk of misstating the financial statements and auditors do not fully mitigate these risks in their audits.
Keywords: accounting policies, accounting consistency, misstatements, auditors
JEL Classification: M41
Suggested Citation: Suggested Citation