Are Audit Disclosures Informative about Future Foreign Earnings?

43 Pages Posted: 21 Nov 2023 Last revised: 18 Apr 2024

See all articles by Russell Barber

Russell Barber

University of Colorado Denver

Jenna Burke

University of Colorado at Denver

Katherine Gunny

University of Colorado at Denver

Date Written: April 17, 2024

Abstract

This paper examines whether audit disclosures regarding changes in foreign component auditor use are informative about the persistence and pricing of foreign earnings. Lead auditors engage foreign component auditors to complete audit work when, amongst other factors, foreign locations are financially significant to the resulting audit. When determining whether and to what extent to use component auditors, the lead auditor gathers private information about the company’s foreign operations. Therefore, changes in component auditor use could reveal information about the ability of current foreign earnings to generate future foreign earnings. Investors might pay attention to these disclosures because the auditor has an information advantage and there is little public information regarding foreign operations. Consistent with this, we find changes in component auditor use are associated with foreign earnings persistence and stronger investor responsiveness to foreign earnings, even after controlling for other foreign information sources such as geographic segments, foreign sales, subsidiaries, and industry-level foreign growth potential. Our evidence suggests that audit disclosures help investors interpret foreign earnings, which is important given prior literature finds that foreign information is scarce and difficult for investors to process.

Keywords: Foreign Earnings; Earnings Persistence; Component Auditor; Form AP

JEL Classification: F23; G14; M40; M41; M49

Suggested Citation

Barber, Russell and Burke, Jenna and Gunny, Katherine, Are Audit Disclosures Informative about Future Foreign Earnings? (April 17, 2024). Available at SSRN: https://ssrn.com/abstract=4611875 or http://dx.doi.org/10.2139/ssrn.4611875

Russell Barber

University of Colorado Denver ( email )

United States

Jenna Burke

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Katherine Gunny (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
77
Abstract Views
334
Rank
587,100
PlumX Metrics