Audit Qualifications of Income-Decreasing Accounting Choices

Posted: 30 Jan 2006

See all articles by Frank D. Hodge

Frank D. Hodge

University of Washington - Michael G. Foster School of Business

Roger D. Martin

University of Virginia - McIntire School of Commerce

Jamie H. Pratt

Indiana University - Kelley School of Business - Department of Accounting

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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 report, Financial performance, Strategic financial reporting

JEL Classification: M41, M43, M49, C93

Suggested Citation

Hodge, Frank Douglas and Martin, Roger Dean and Pratt, James H., Audit Qualifications of Income-Decreasing Accounting Choices. Contemporary Accounting Research, Vol. 23, No. 2, 2006, Available at SSRN: https://ssrn.com/abstract=878549

Frank Douglas Hodge (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Paccar Hall 540, Box 353200
Seattle, WA 98195-3200
United States
206-616-8598 (Phone)
206-685-9392 (Fax)

Roger Dean Martin

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

James H. Pratt

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2657 (Phone)
812-855-8679 (Fax)

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