Earnings Manipulation Risk, Corporate Governance Risk, and Auditors' Planning and Pricing Decisions

28 Pages Posted: 4 Oct 2006

See all articles by Jean C. Bedard

Jean C. Bedard

Bentley University - Department of Accountancy

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Abstract

This paper investigates auditors' assessments of earnings manipulation risk and corporate governance risk, and their planning and pricing decisions in the presence of these identified risks. To conduct this investigation, we use engagement partners' assessments of their existing clients made during the participating public accounting firm's client continuance risk assessment process. We find that auditors plan increased effort and billing rates for clients with earning manipulation risk, and that the positive relationships between earning manipulation risk and both effort and billing rates are greater for clients that also have heightened corporate governance risk. These finding provide evidence that auditors assess situations involving both an aggressive management and inadequate corporate governance, and that there is a relationship between those assessments and auditors' planning and pricing decisions.

Keywords: Earnings manipulation, Earnings management, Corporate governance, Audit planning, Audit pricing, Risk

Suggested Citation

Bedard, Jean C. and Zehms, Karla M., Earnings Manipulation Risk, Corporate Governance Risk, and Auditors' Planning and Pricing Decisions. Accounting Review, Vol. 79, No. 2, pp. 277-304, 2004. Available at SSRN: https://ssrn.com/abstract=934192

Jean C. Bedard (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

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