Culverhouse School of Accountancy

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Are audit-related factors associated with financial reporting quality in nonprofit organizations?
(University of Alabama Libraries, 2012) Garven, Sarah Ann; Parsons, Linda M.; University of Alabama Tuscaloosa
In this paper I examine the effects of various audit-related factors on financial reporting quality in nonprofit organizations (NPOs). Similar to for-profit organizations, NPOs have incentives to report favorable financial results. However, whereas for-profit organizations focus on earnings, of particular importance to NPOs is the program ratio - the proportion of total expenses dedicated to providing programs that fulfill an organization's mission relative to supporting the organization (i.e., fundraising efforts and administration). A nonprofit can inflate its program ratio by opportunistically shifting expenses away from administration and fundraising and toward programs. Although several for-profit papers have examined the impact of audit-related factors on financial reporting quality, especially with regard to earnings management, there is very little evidence on the effects of these factors on financial reporting quality in NPOs. Due to important audit environment and institutional differences between the nonprofit and for-profit sectors, results on audit-related factors in for-profit organizations may not necessarily hold for nonprofit organizations. Thus, the nonprofit sector provides a useful setting to test the generalizability of the effects of audit-related factors on financial reporting quality from the for-profit sector to other sectors. Using logistic regression analyses, my results suggest that audit fees, new auditors, and the Sarbanes-Oxley Act may have some effect on financial reporting quality in nonprofit organizations. In addition, auditor assessments related to auditee risk, going-concern issues, and reportable conditions over financial reporting also may be factors in nonprofit financial reporting quality. However, contrary to results found in for-profit studies, new auditors and reportable conditions over financial reporting appear to be associated with higher nonprofit financial reporting quality, and auditor size using the traditional Big 4/non-Big 4 designation, as well as audit lag, do not appear to be significant factors in determining nonprofit financial reporting quality. Results are mixed with respect to auditor specialization. Overall, my study provides some evidence that certain audit-related factors are associated with financial reporting quality in nonprofit organizations, and also confirms that, due to the uniqueness of the nonprofit audit environment, results from for-profit studies cannot necessarily be generalized to the nonprofit sector.
The delay in recognizing goodwill impairment: flawed audit methodology or insufficient effort
(University of Alabama Libraries, 2016) Sorensen, Trevor; Lopez, Thomas J.; University of Alabama Tuscaloosa
In this study I examine whether the delay in recognizing goodwill impairment is associated with an audit process failure. Prior research finds that economic indicators of goodwill impairment precede the actual recognition of impairment by at least three years (Hayn and Hughes, 2006; Li et al., 2011; Ramanna and Watts, 2012; Li and Sloan, 2014). Griffith et al. (2015) suggest that auditors’ inability to properly audit fair value estimates (i.e., an audit process failure) is potentially the result of the auditor using a flawed methodology and/or an overreliance on management assertions (i.e., inadequate effort). I explore which of these is main explanation for the delay in recognizing goodwill impairment. Using a logistic model, I identify unrecognized goodwill impairment companies (UGI) and match them with companies that had no unrecognized goodwill impairment (NGI) and companies that recognized goodwill impairment (IMP). Utilizing fees as a proxy for audit effort, I provide evidence that auditors put forth more effort to test UGI companies for impairment when compared to NGI companies. This is consistent with auditors putting forth more effort when indicators of impairment are present. On the other hand, I find that auditors put forth the same level of effort for UGI and IMP companies. This is inconsistent with the expectation of increased effort due to the potential for material misstatement and increase litigation risk to the auditor since no impairment is recognized by UGI companies. Combined with Griffith et al., I infer that both a flawed methodology and insufficient audit effort contribute to the delay in recognizing goodwill impairment.
Do auditors' perceptions of materiality change in response to approaching deadlines?
(University of Alabama Libraries, 2012) Bennett, George Bradley; Hatfield, Richard C.; University of Alabama Tuscaloosa
This study examined the impact that deadline pressures have on auditors' perceptions of materiality. I use the context of the audit of Internal Controls over Financial Reporting (ICFR) to determine whether the year-end deadline impacts auditors' assessment of control deficiencies. I also considered how the perceived cause of the increased deadline pressure (i.e., whether the timing of testing is the auditor's fault) may further affect the auditors' judgment of significance. To evaluate these decisions, I used a 3x2 between-subjects experiment, manipulating time deadline pressure (low, high, and post-deadline) and the cause of the deadline pressure (auditor fault or not). I measured the auditors' assessment of the materiality of an identified control deficiency, as well as the amount of audit evidence the auditor would consider sufficient for retesting remediated controls. Findings suggest an interactive effect on auditors' materiality assessments of errors/deficiencies when they identify the error under high deadline pressure and the auditor is at fault for creating the higher pressure, resulting in a lower assessment of the errors' materiality under these conditions. Further, auditors are willing to test fewer items when the auditor is at fault for creating deadline pressure, as well as accepting a higher deviation rate for the sample (i.e., the auditors will accept more errors/deficiencies in fewer sample items). However, auditors increased their materiality judgments of identified errors when deadline pressure was no longer present (after year-end), even though incentives to issue an unqualified opinion still exist. This study extends existing literature by examining the temporal effects on materiality, specifically the auditor's perceptions and application of materiality. It also complements recent archival research examining consequences of adverse opinions on the audit of ICFR (e.g., Cassell et al., 2011; Hammersley et al., 2010) by considering how pressures and incentives to avoid such consequences influence the audit of ICFR.
Donors, distance, and the influence of accounting information
(University of Alabama Libraries, 2020) Mercado, Julie; Parsons, Linda M.; University of Alabama Tuscaloosa
In this study, I test a practical intervention to a problematic occurrence in nonprofit organizations: the overemphasis of spending ratios, specifically the program ratio, when assessing nonprofit performance. Prior research indicates that donors place undue focus on not-for-profit (NFP) program ratios, which can result in suboptimal giving decisions because these ratios provide an incomplete measure of performance. To address this, regulators recommend that organizations provide explanatory information to aid donors in better understanding NFP performance. I present theoretical and experimental evidence to show that donations to an NFP with a low program ratio are higher if explanatory information is provided, and this effect is greater when the presentation of that information (concrete vs. abstract) is congruent with a donor’s distance (near vs. far). Additionally, I find that donors whose distance is far from an organization are more likely to be influenced by favorable desirability (goal-related) information than those whose distance is near. If donors are provided with unfavorable desirability information, they tend not to further penalize an NFP with a low program ratio if they are also provided with favorable feasibility (process-related) information (e.g., explanatory information). This study provides important insights regarding the communication of accounting information. Results suggest that the provision of explanatory information causes the negative impact of a low program ratio to decline, resulting in an increased willingness to donate to an NFP, especially when the explanatory information is congruent with a donor’s distance. While explanatory information does not change performance, it – along with favorable desirability information – can aid donors in better understanding the purpose and strategies of NFP spending.
Dual signals of future performance: how will the compensation committee respond?
(University of Alabama Libraries, 2012) Leggett, Denise Marie; Reitenga, Austin L.; University of Alabama Tuscaloosa
Pay-for-performance is an important contracting tool available to mitigate agency costs. Matsunaga and Park (2001) suggest CEOs of firms that meet or beat (miss) the analysts' forecast receive a bonus compensation premium (discount) in affirmation of a pay-for-performance relation based on extant literature that suggests meet or beat firms outperform miss firms. However, Bhojraj, Hribar, Picconi, and McInnis (2009) more recently suggest miss firms with a positive signal of future performance outperform beat firms with a negative signal of future performance. I extend Matsunaga and Park (2001) by examining the incremental contribution of a positive/negative future performance signal in the determination of CEO bonus compensation to determine if the pay-for-performance relation holds, particularly for the subset of firms with conflicting analysts' forecast/future performance signals. Generally, my hypotheses predicting the future performance signal will incrementally contribute to the determination of bonus compensation are unsupported. This result is consistent with a breakdown in the pay-for-performance relationship attributable to either a myopic focus on an earnings threshold signal or an inability to interpret the future performance signal. Alternately, this result could also suggest the firm considers the cost of missing the forecast to be greater than the cost associated with a decline in future performance.
The effect of off-site audit work on the judgment quality and development of staff auditors
(University of Alabama Libraries, 2016) Carrasco, Heather; Hatfield, Richard C.; University of Alabama Tuscaloosa
This study experimentally examines the effects of recent increases in off-site audit work (e.g., task-specific experience and social environment) on the judgment quality and development of staff auditors. First, I examine how preparing testwork (i.e. task-specific experience) affects the subsequent performance of staff auditors’ workpaper review. Second, I consider how the physical presence or absence (i.e., social environment) of a high-ranking auditor affects the judgment quality of staff auditors. I provide evidence that staff auditors, who have the opportunity to prepare basic audit tasks prior to reviewing workpapers, identify more mechanical seeded errors than auditors who only review workpapers. Further, I find that the presence of a high-ranking auditor improves the performance of staff auditors in completing a subsequent workpaper review task, especially when the participants prepare testwork prior to reviewing workpapers. The results of this study highlight the practical implications of the current audit environment; as well as contributing to the emerging literature examining off-site audit work.
Effects of the concept release on the auditor's reporting model on jury verdicts of auditor's legal liability
(University of Alabama Libraries, 2013) Brasel, Kelsey; Hatfield, Richard C.; University of Alabama Tuscaloosa
This study examines the potential effects of the PCAOB's Concept Release 2011-003 to the standard auditor's report on an auditor's negligence liability. Specifically, I examine the effect of a required emphasis paragraph on the likelihood of guilty verdicts and damage awards in auditor negligence trials. Using a case study, participants determine the legal liability outcomes of a case against an auditor when an emphasis paragraph is absent compared to when the paragraph discusses significant accounts and estimates, as dictated by the Concept Release. This study utilizes hindsight bias and attribution theory, which relate to an individual's ability to reconstruct causal series of events ex-post, thereby affecting assumed foreseeability and responsibility. I predict the auditor's likelihood of guilty verdicts and damage awards will be higher when the emphasis paragraph is present (as required by the Concept Release) compared to when an emphasis paragraph is not provided. I also examine the likelihood of guilty verdicts and damage awards when an emphasis paragraph is present but differs in content. Consistent with hypothesized results, I find evidence that the presence of an emphasis paragraph in the auditor's report affects guilty verdicts. Specifically, the presence of an emphasis paragraph, regardless of content, increases guilty verdicts by jurors compared to when the emphasis paragraph is not present. However, contrary to hypothesized results I do not find evidence that the content of the emphasis paragraph in the auditor's report affects the magnitude of compensatory damage awards. Therefore, results suggest jurors have higher instances of guilty verdicts in an auditor negligence trial when the auditor's report contained an emphasis paragraph, regardless of if the emphasis paragraph did or did not discuss the account that eventually resulted in the audit failure. Results of this study have practical implications and contribute to both audit and legal liability literature. The topic of this study, the effects of a required emphasis paragraph in the standard auditor's report on an auditor's legal liability, remains important as the PCAOB considers requiring future changes to the auditor's reporting model.
An examination of analysts’ target price forecasts after accounting misstatements
(University of Alabama Libraries, 2020) Street, Daniel Alan; Swanquist, Quinn; University of Alabama Tuscaloosa
I investigate the magnitude, accuracy, and informativeness of analysts’ target price forecast revisions after material negative accounting misstatements. Although prior researchers find that analysts’ earnings forecasts decline after misstatements, the effects of misstatements upon analysts’ target price forecasts have not yet been investigated. Relative to analysts’ target price forecasts for control firms, I find that analysts decrease their target price forecasts more sharply for misstating firms. Although analysts’ target price forecast revisions are somewhat less accurate for misstating firms, I find that analysts’ target price forecast revisions for misstating firms remain informative to the stock market. Several misstatement and target price forecast characteristics (misstated account, misstatement intention, SEC investigation, and CEO turnover after misstatement) affect the average magnitude, accuracy, and informativeness of analysts’ target price forecast revisions. These findings inform investors regarding the extent to which they may effectively rely upon analysts’ target price forecasts after material negative accounting misstatements and contribute to our knowledge of the value relevance of historical accounting and future earnings expectations for sell-side analysts.
An examination of the theoretical links between symmetric timeliness, asymmetric timelines, and conditional conservatism
(University of Alabama Libraries, 2015) Ruch, George; Taylor, Gary; University of Alabama Tuscaloosa
Prior research has considered the ability of earnings recognition tendencies to proxy for conditional conservatism, but has yet to fully explore the validity of the theoretical link between these tendencies and conditional conservatism. This study analytically and empirically examines the extent to which two common earnings recognition tendencies, symmetric timeliness and asymmetric timeliness, are consistent with the theoretical definition of conditional conservatism. First, I demonstrate how symmetric and asymmetric timeliness contribute to the understatement of accounting net asset value. Second, I evaluate the extent to which symmetric and asymmetric timeliness are observable through their respective empirical estimates. I find that the extent to which symmetric timeliness and asymmetric timeliness meet the theoretical definition of conditional conservatism is dependent on the relative accumulations of economic gains and losses. Additionally, I find that asymmetric timeliness is only partially observable within the Basu (1997) Asymmetric Timeliness measure.
The financial reporting and tax aggressiveness implications of schedule utp
(University of Alabama Libraries, 2015) Davenport, Stephan Arthur; Stone, Mary S.; University of Alabama Tuscaloosa
In 2010, the Internal Revenue Service (IRS) announced the requirement to disclose uncertain tax positions (UTPs) on a new schedule (Schedule UTP) to be filed with federal corporate income tax returns. Schedule UTP requires companies to report line-item detail to the IRS of the aggregate disclosure requirement of uncertain tax benefits (UTBs) established by FIN 48 (KPMG 2010a). I examine firms’ change in reporting UTBs subsequent to the announcement of Schedule UTP. Overall, the results indicate firms reduce not only the levels of reported UTB, but they also significantly reduced the year to year changes in reported UTBs. Consistent with my predictions, firms which are required to file Schedule UTP earlier have an incrementally more significant reduction in reported UTBs. Results provide mixed evidence for financially conservative firms. Contrary to expectations, the decrease in reported UTBs is not incrementally more significant for firms in the upper quartile of tax aggressiveness. Additionally, I examine whether the announcement of Schedule UTP impacts other proxies for tax aggressive behavior. Results indicate that book-tax differences decrease subsequent to Schedule UTP. However, neither measure of tax aggressiveness based on effective tax rates provides statistically significant results. This finding suggests the decrease in reported UTBs is merely a change in reporting behavior and not a change in aggressive tax behavior.
How and why does real earnings management affect auditors' evaluations of management's estimates?
(University of Alabama Libraries, 2015) Commerford, Benjamin P.; Hatfield, Richard C.; Houston, Richard W.; University of Alabama Tuscaloosa
Prior research often asserts that, because real earnings management (REM) does not violate Generally Accepted Accounting Principles (GAAP), it is not likely to draw auditor scrutiny. However, informed by Correspondent Inference Theory, I predict and find that observing REM can affect auditors' decisions in audit areas unrelated to REM. This study reports the results of an experiment in which auditors evaluate quantitatively immaterial audit differences arising from management's subjective estimates. I manipulate the presence versus absence of REM, and whether or not the audit difference affects the client's ability to meet an earnings target (i.e., qualitative materiality). Results indicate that, when a quantitatively immaterial audit difference affects the client's ability to meet an earnings target, auditors have a higher propensity to propose an adjustment. Further, regardless of whether or not the audit difference is qualitatively material, auditors are more likely to constrain management's estimates in the presence of REM. Finally, consistent with the notion of a cascading effect of dispositional inferences, I find that auditors' perceptions regarding the aggressiveness of management's disposition mediate the effect of REM on auditors' adjustment decisions. Additional analyses indicate that, when the audit difference is qualitatively material or when REM is present (or both) auditors have a heightened concern that management's estimates are biased. This study contributes to the literature by demonstrating that auditors' altered perceptions, stemming from observing REM, can affect their treatment of audit differences and, ultimately, impact the financial statements.
Intangible assets and default risk: an examination of the credit default swap market
(University of Alabama Libraries, 2013) Hill, Mary; Taylor, Gary; University of Alabama Tuscaloosa
In this study I examine the impact of intangible assets on default risk. Extant research primarily focuses on the relevancy of intangible assets in the equity markets, but the relevance of intangible assets in the credit markets has not been extensively explored. In fact, due to the differences between equity and debt, it is not apparent that the relevance of intangible assets would be the same for the equity and credit markets. Using data from the credit default swap (CDS) market, I provide evidence that both capitalized and uncapitalized intangible assets reduce default risk and that uncapitalized intangible assets are just as relevant to the CDS market as the items capitalized on the balance sheet. I also find that, uncapitalized intangible assets are more relevant for high default risk firms compared to low default risk firms and less relevant for high growth firms compared to low growth firms. Finally, I provide evidence of a market inefficiency for those firms with a low risk of default. Specifically, the CDS market appears to overreact to changes in debt but underreact to changes in uncapitalized intangible assets. This finding suggests that credit markets, similar to equity markets, would benefit from additional disclosures of intangible assets which are currently not capitalized.
An investigation of the relationship between mindsets and tasks in an audit environment
(University of Alabama Libraries, 2020) Blum, Emily; Hatfield, Richard C.; University of Alabama Tuscaloosa
This dissertation consists of two studies that investigate the connection between mindset and task in the audit environment. The first study, presented in Chapter 2, investigates how a creative mindset will influence auditor decision making on two different task types: structured and ill-structured tasks. A creative mindset can contribute to audit quality by helping auditors recognize problems, generate novel solutions, and overcome fixation on irrelevant data. However, creativity may come with costs—recent psychology research has found that creative individuals are more likely to engage in ethically questionable behaviors. I leverage regulatory fit theory (Higgins 2000; Higgins 2009) to propose an expanded theoretical model of the link between creativity and unethical behavior that integrates task structure into the existing model. Contrary to my predictions, I find that more creative auditors outperform less creative auditors on both structured and ill-structured tasks. Consistent with my predictions, I find that an ill-structured audit task activates a creative mindset. Although I found no evidence of the costs of creativity that have been found in previous works, future research is necessary to explore whether the “dark side” of creativity has implications for audit quality. The second study, presented in Chapter 3, investigates whether skeptical judgment and skeptical action are best facilitated by distinct and contrasting mindsets. Professional skepticism is an essential element of a high-quality audit. I present a framework in which the two elements that comprise professional skepticism—skeptical judgment and skeptical action—differ in that skeptical judgment involves heeding risks whereas skeptical action involves overcoming risks. This distinction suggests that a mindset that facilitates skeptical judgment may impede skeptical action, and vice versa. To test this proposition, I leverage the mindset theory of action phases (Gollwitzer 1990) to align skeptical judgment and skeptical action with two distinct and contrasting mindsets: skeptical judgment with a deliberative mindset, and skeptical action with an implemental mindset. I conduct an experiment in which I manipulate participants’ mindset, and then test both their skeptical judgment and skeptical action on an audit task. Consistent with theory, I find that skeptical judgment and skeptical action are facilitated by contrasting mindsets, which has important implications for researchers and practitioners designing interventions to improve auditor skepticism.
Is corporate social responsibility associated with perceived financial reporting credibility
(University of Alabama Libraries, 2016) Bordere, Jasmine; Parsons, Linda M.; Taylor, Gary; University of Alabama Tuscaloosa
I examine the association between corporate social responsibility (CSR) and the perceived credibility of corporate financial reporting. Using the analyst forecast dispersion and the earnings response coefficient as measures of perceived financial reporting credibility, I evaluate whether market participants (analysts and investors) perceive the financial reporting of socially responsible firms (CSR firms) to be of higher credibility than that of less socially responsible firms (non-CSR firms). First, I investigate the difference of the quarterly analyst forecast dispersion between CSR and non-CSR firms. Then, I separately examine the difference of the three-day window earnings response coefficient around quarterly earnings announcements between CSR firms and non-CSR firms under positive earnings surprises and negative earnings surprises. Results documented in this study indicate that market participants perceive financial reporting of CSR firms to be of higher credibility than that of non-CSR firms by placing a higher level of reliance on CSR firm-provided financial information, resulting in CSR firms having a lower analyst forecast dispersion and a higher earnings response coefficient when earnings surprises are positive. However, when earnings surprises are negative, since the financial reporting credibility is less questionable, the earnings response coefficient of CSR firms is not different from that of non-CSR firm. This study extends a stream of research that seeks to link CSR to firm performance/value by providing empirical evidence on how CSR is related to a firm’s stock price through its perceived financial reporting credibility. By separately examining positive and negative earnings surprises, I expect to provide possible explanations to the conflicting results documented in prior research. This study also extends our understanding of market reactions to firms being socially responsible from investors’ reactions to analysts’ reactions.
Is financial reporting and audit quality lower when auditors lack independence
(University of Alabama Libraries, 2020-08) Robinson, Ranier Michael; Lopez, Thomas J.; University of Alabama Tuscaloosa
The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) are concerned about circumstances that threaten auditor independence based on their belief that auditor independence is essential to the efficiency of capital markets. The relationship between auditor independence and financial reporting and audit quality, have been difficult to establish because the extent of auditor independence is unobservable. Prior research has relied on proxies for auditor independence, and overall the results provided by this research are mixed. In this study, I utilize a sample of firms that switch auditors retrospectively to avoid further violation of SEC independence rules—as a more direct measure of auditor independence. Using propensity score matching and a difference-in-differences research design, I find evidence that independence violations are associated with impaired financial reporting and audit quality. Further, I find improvements in both financial reporting and audit quality subsequent to an auditor switch for independence violation firms relative to non-independence issue control firms. Overall, these results provide justification for regulators’ concerns about the potential negative consequences of a lack of auditor independence on financial reporting quality and audit quality.
Is the character of SEC comment letters relevant to recipients?: empirical evidence of constraining allowance for doubtful accounts
(University of Alabama Libraries, 2017) Rippy, Jordan; Stone, Mary S.; Buchheit, Steven R.; University of Alabama Tuscaloosa
Prior research has provided mixed results regarding changes in firm behavior in response to comment letters from the Securities and Exchange Commission (SEC) (Johnston and Petacchi 2016; Kubick, Mayberry, Omer, and Lynch 2016; Robinson, Xue, and Yu 2011; Wang 2016). This study documents that comment letters come in two main categories: accounting-focused letters and disclosure-focused letters. I examine whether the character of comment letters (accounting versus disclosure) impacts a firm’s response to comment letters questioning the allowance for doubtful accounts (AFDA). I find that firms with abnormal accruals in the AFDA are more likely to receive an accounting-focused comment letter and these firms are also more likely to constrain AFDA-related earnings management behaviors in the period after comment letter resolution. Disclosure-focused comment letters exhibit no such patterns. The results of this study suggest (1) the lack of consistent findings in prior research may be partially attributable to homogenously classifying dissimilar comment letters and (2) the SEC filing review and comment letter process may be an effective tool in monitoring and constraining earnings management behaviors.
The lingering effects of multi-tasking on auditors' judgment quality
(University of Alabama Libraries, 2015) Mullis, Curtis; Hatfield, Richard C.; University of Alabama Tuscaloosa
Auditors must frequently multi-task in order to complete audit tasks efficiently, but the potential negative impact of multi-tasking on auditors' judgment quality is poorly understood. In this study, I address this issue and provide evidence that multi-tasking depletes auditors' ability to maintain cognitive focus, resulting in an impaired ability to identify seeded errors, particularly conceptual errors, during a subsequent workpaper review task. Importantly, this negative consequence is mitigated when auditors are exposed to an intervention based on a theoretical countermeasure (positive affect) designed to replenish decision makers' self-control resources. Given that multi-tasking is a pervasive feature of the current audit environment, and that depletion is expected to influence other complex audit tasks, these findings have direct implications for audit practice. Beyond identifying multi-tasking as a cause of impaired performance in auditing, this study's results provide initial evidence that such negative effects can be mitigated, resulting in improved judgment quality and, by extension, improved financial statement quality.
The long-term consequences of disclosure complexity on a firm’s information environment: evidence that disclosure complexity reduces information asymmetry
(University of Alabama Libraries, 2021) Lawson, James; Lopez, Thomas; University of Alabama Tuscaloosa
Motivated by recent regulatory discussion on the effects of disclosure length and complexity on investors—which mirrors disagreement in the academic literature on how disclosure “complexity” affects market participants— I investigate the long-term effects of complex disclosures on a firm’s information environment. I find that firms with complex disclosures are characterized by a relatively better information environment than firms with less complex disclosures. While prior research has primarily focused on investor reactions to the filing of a complex disclosure, such as to the initial filing of a firm’s 10-K, I examine the investor response to future firm disclosures. I show that firms that issue complex 10-Ks have lower levels of investor disagreement and information asymmetry at future earnings announcement dates. My study has two important implications. First, my results suggest, contrary to regulatory concerns, that disclosure complexity leads to lower levels of information asymmetry, which results in a more level playing field for investors. Second, I contribute to the academic debate on the effects of disclosure complexity by demonstrating that the time horizon used in the evaluation process is critical in assessing the overall consequences of complexity for a firm’s information environment.
Opportunistic financial reporting and credit market participation in municipalities
(University of Alabama Libraries, 2016) Beck, Amanda Wilson; Parsons, Linda M.; University of Alabama Tuscaloosa
The concept of opportunistic financial reporting (OFR) is similar to earnings management in the corporate sector, but acknowledges several key differences in the governmental sector – most importantly, (a) most governmental revenues are not “earned” in the traditional sense, and (b) governments follow a unique reporting model, which utilizes both full accrual and modified accrual accounting, resulting in two separate sets of financial statements. In this study, I use a unique dataset of hand-collected financial data from over 200 Californian municipalities over a five-year period (2009-2013) to provide insight into three important aspects of OFR: motivation, methods, and materiality. With respect to motivation, I find that governments are incentivized to use OFR to pursue a breakeven income in both the full accrual and modified accrual financial statements, and that credit market participation significantly influences these activities. With respect to the methods of OFR, I find evidence that municipalities use discretion over accruals, make general fund transfers, and time asset sales opportunistically. With respect to materiality, I find evidence that municipalities are more likely to use OFR to fully avoid reporting a deficit when creditor scrutiny is high. My findings contribute to existing research that examines the association between credit market participation and accounting choices in governments. I also contribute to an emerging stream of research that examines managerial opportunism within the governmental reporting model.
Three essays on audit committees and financial reporting quality
(University of Alabama Libraries, 2010) Abernathy, John Lewis; Taylor, Gary; University of Alabama Tuscaloosa
This dissertation investigates the relationship between audit committee characteristics and financial reporting quality. The dissertation is organized into three essays that examine this topic. The first two essays examine audit committee characteristics and their association with various measures of financial reporting quality. Essay Three summarizes relevant literature regarding conservatism, a measure of financial reporting quality. In Essay One, I examine whether adding board members with accounting financial expertise to the audit committee is associated with an increase in a firm's accounting conservatism. The results of this study provide evidence that the addition of accounting expertise is positively associated with higher conservatism as measured by the Penman and Zhang (2000) C-Score measure of conservatism, but only for firms with a strong governance structure. For firms with weak governance, the addition of accounting expertise to the audit committee is associated with higher levels of conservatism as measured by the Givoly and Hayn (2000) negative accruals measure of conservatism. However, the addition of accounting financial expertise is not associated with higher levels of conservatism as measured by the Beaver and Ryan (2000) book-to market measure. Sensitivity analysis suggests that the addition of accounting financial expertise is associated with higher conditional conservatism as measured by the Basu (1997) asymmetric loss recognition measure. In Essay Two, I investigate the association between analyst earnings forecast properties and the presence of accounting financial expertise on audit committees. The results indicate that the presence of accounting financial expertise is associated with significantly higher forecast accuracy and significantly lower forecast dispersion. Additionally, I find that the non-accounting financial expertise is significantly associated with higher analyst forecast accuracy and lower forecast dispersion, but nonfinacial expertise is not. Essay Three summarizes relevant literature regarding conservatism, a measure of financial reporting quality.

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