Does Auditor Style Influence Non-GAAP Reporting?

Abstract

We examine whether auditor style is associated with non-GAAP disclosures. Specifically, we find that clients audited by the same auditor are more likely to disclose non-GAAP earnings in a similar manner. We assess disclosure similarity using (1) the decision to disclose non-GAAP earnings, (2) the disclosure prominence of non-GAAP earnings, and (3) the discussion of non-GAAP earnings in the management discussion and analysis of the annual report. We find that the association between auditor style and non-GAAP disclosure is determined by Big 4 accounting firms and clients audited by the same audit office within an audit firm. We also find some evidence that auditor style is associated with clients’ choices to exclude recurring items and non-GAAP disclosure quality. Finally, the audit office level results are incremental to similarity that results from geographical proximity. Our results are relevant to current policy discussions regarding auditor involvement in unaudited non-GAAP earnings reporting.

Keywords: Auditor style, non-GAAP reporting, Big 4 accounting firms