Audit Qualifications of Income-Decreasing Accounting Choices

Abstract

In this study we conduct a field experiment to examine how qualifying an income-decreasing accounting change in years of strong financial performance affects user assessments of strategic reporting, current financial performance, and financial performance over the next three years (future performance). We find that without the qualification, users viewed the income-decreasing accounting change as relatively non-strategic, and user assessments of current and future performance were not different. In the presence of the qualification, users believed that the accounting change was relatively strategic, they discounted the income effect of the accounting change, and their assessments of future performance were below their assessments of current performance but no different from the assessments of future performance in the absence of the qualification. While our findings suggest audit qualifications encourage users to be skeptical of income-decreasing accounting changes, we find no evidence that they impose negative consequences on management in terms of lower assessments of financial performance.

Keywords: Income-decreasing accounting changes, audit reports, financial performance, strategic financial reporting

JEL Classification: M41, M43, M49, K22