Do High-Quality Auditors Improve Non-GAAP Reporting?

55 Pages Posted: 29 Apr 2022

See all articles by Zhuoan Feng

Zhuoan Feng

The University of Waikato

Jere R. Francis

Maastricht University

Yaowen Shan

University of Technology Sydney; Financial Research Network (FIRN)

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN)

Date Written: March 30, 2022

Abstract

Prior research finds that clients of high-quality auditors report higher quality GAAP earnings. We extend this research to investigate whether auditor quality is associated with the quality of voluntarily disclosed non-GAAP earnings measures. Using a sample of Australian firms disclosing annual non-GAAP metrics, we find that clients of high-quality auditors are more likely to voluntarily disclose non-GAAP earnings numbers. However, clients of high-quality auditors make adjustments in calculating non-GAAP earnings (non-GAAP exclusions) that are less predictive of future earnings and less value relevant than those of other firms. These results indicate that their adjustments are of higher quality. We also find similar results for US firms using a sample of quarterly non-GAAP earnings disclosures. Overall, our evidence indicates that commonly used indicators of audit quality for GAAP reporting are positively associated with the quality of voluntarily disclosed non-GAAP earnings measures.

Keywords: Non-GAAP disclosures, Big 4 auditors, Industry specialization

JEL Classification: J33, M41

Suggested Citation

Feng, Zhuoan and Francis, Jere R. and Shan, Yaowen and Taylor, Stephen L., Do High-Quality Auditors Improve Non-GAAP Reporting? (March 30, 2022). Available at SSRN: https://ssrn.com/abstract=4087878 or http://dx.doi.org/10.2139/ssrn.4087878

Zhuoan Feng

The University of Waikato ( email )

Hillcreset
Hamilton, Waikato 3216
New Zealand

Jere R. Francis

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Yaowen Shan (Contact Author)

University of Technology Sydney ( email )

PO Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://profiles.uts.edu.au/Yaowen.Shan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Stephen L. Taylor

University of Technology Sydney ( email )

UTS Business School
PO Box 123 Broadway
Sydney, NSW 2007
Australia
61295143437 (Phone)
61295143513 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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