Audit Evidence Quality: The Role of Accounting Managers and Their Sense of Power
50 Pages Posted: 2 Jun 2022
Date Written: May 23, 2022
I examine whether company managers who report more aggressively obfuscate their behavior from external auditors by manipulating audit evidence quality and whether managers' manipulation strategies depend on how powerful they feel. I argue that managers manipulate audit evidence quality using two strategies: (1) loading the evidence set with less reliable (i.e., trustworthy) evidence and (2) omitting information that casts doubt on managers’ financial statement assertions. Using an experiment, I find that managers use these strategies to manipulate evidence quality when they report more aggressively. Further, I find that when managers report more aggressively, more (less) powerful feeling managers exhibit a preference for the first (second) strategy. These findings suggest that managers who feel both more and less powerful are complicit in manipulating audit evidence quality when they report more aggressively, decreasing audit quality and, ultimately, increasing the likelihood that troublingly aggressive reporting reaches investors.
Keywords: aggressive reporting, audit evidence, audit quality, earnings management, earnings quality, power.
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