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(2022) Wang, JunThesisTwo recent changes in corporate reporting involve the inclusion of both GAAP and non-GAAP earnings in the annual report and the inclusion of Key Audit Matters (KAMs) in the auditor's report. Managers have discretion in determining the excluded items in non-GAAP reporting. The frequently excluded items in non-GAAP earnings, such as goodwill impairment loss, are also frequent items discussed in KAMs. The research on non-GAAP earnings excluding a KAM item helps us understand how the auditor's report can impact investors' use of non-GAAP measures. This dissertation provides evidence on how investors react to managers' non-GAAP reporting and auditors' KAM disclosures through two studies. In Study One, I conduct a 2×2 between-subjects experiment to investigate the joint effect of excluding a KAM item relating to goodwill impairment loss from non-GAAP earnings and investor position on investor judgments. Drawing on motivated reasoning theory, I predict and find that for investors holding a long (short) position, investors perceive management to be more (less) credible when non-GAAP earnings exclude a KAM item than when non-GAAP earnings do not exclude a KAM item. In addition, lower management credibility assessments result in higher impairment loss estimates (i.e., less favourable earnings-related judgments). These findings inform regulators and managers on the impact of KAM disclosures on investors' reactions to non-GAAP reporting. Study Two holds constant the investor position as long investors, and the non-GAAP earnings with a KAM item excluded. I conduct a 1×4 between-subjects experiment. The four conditions are the high awareness of management discretion in non-GAAP earnings condition, the high auditor scepticism implied in the KAM disclosures condition, the audit outcome presence in the KAM disclosures condition, and a control condition without any treatment. I find that when investors have a higher awareness of management discretion in non-GAAP reporting, their earnings-related judgments are more favourable than those who have lower awareness of management discretion in non-GAAP earnings (i.e., the control condition). The level of scepticism implied in the description of how the KAM was addressed in audits and including the outcome of the auditor's procedures in the KAM disclosures do not significantly affect long investors' earnings-related judgments.
The Effects of Electronic Round-robin Brainstorming and an Explicit Idea Evaluation Process on Auditors’ Fraud Planning(2022) Zhang, JessicaThesisAuditing standards require engagement team members to brainstorm the susceptibility of their clients’ financial statements to material misstatement due to fraud. The format of the brainstorming is not specified in the auditing standards but is continually evolving in practice with the increased use of audit technology. This thesis considers an electronic round-robin brainstorming and an explicit idea evaluation process in fraud brainstorming and investigates the effects of these two interventions on auditors’ brainstorming performance in fraud planning. I use a 2 × 2 between-subject experimental design with 78 experienced auditors in Australia as participants. The electronic round-robin brainstorming is manipulated at two levels: absent and present. The explicit idea evaluation process is also varied at two levels: absent and present. Therefore, the four experimental treatments are control condition, round-robin condition, explicit idea evaluation condition, and combined condition. Auditors in the round-robin condition and combined condition are asked to take turns with another team member to share their fraud hypotheses generations. The inputs of the other team member are pre-programmed in the computer system. Auditors in the explicit idea evaluation condition and the combined condition are asked to provide an explicit idea evaluation immediately after they receive each of the inputs of the other team member. The auditors’ brainstorming performance is measured as the overall quantity of unique valid fraud hypotheses generated in all three brainstorming stages. Moreover, I examine auditors’ information search and processing during fraud brainstorming. Results show that auditors in the round-robin condition have better brainstorming performance than those in the control condition and it is because they pay a higher level of attention to their team member’s inputs. However, the brainstorming performance of auditors in the explicit idea evaluation condition is not different from those in the control condition and below those in both the round-robin condition and the combined condition. There is no performance difference between auditors in the round-robin condition and those in the combined condition. Furthermore, I find that the inputs of the other team member influence auditors’ information search.
The Effects of Auditors’ Online Information Search Effort in the Settings of Regulatory Reviews and Business Combinations(2023) Han, MiaodiThesisThis thesis examines whether non-client companies’ online disclosures serve as an external information source for auditors and whether auditors’ searches for such information facilitate their audit process and influence the outcomes in various important corporate event settings, including regulatory reviews by the U.S. Securities and Exchange Commission (SEC) and mergers and acquisitions (M&A). Specifically, I exploit the clickstream data from the SEC’s EDGAR system, which allows me to track audit firms’ access to public firms’ electronic filings to investigate the effects of auditors’ information searches on the outcomes of regulatory reviews and M&A. The first study examines the usefulness of non-client industry peer companies’ financial filings for auditors to resolve the SEC’s review process on their clients. I hypothesize and find that audit firms can facilitate the resolution of the SEC’s comment letters for their clients through the disclosure benchmarking strategy against their client’s industry peers. Further analyses suggest that this benchmarking effect on the resolution of the regulatory process operates through two economic channels related to regulatory risk and information endowment. In addition, I find a positive association between the auditor’s disclosure benchmarking of peer firms in the regulatory process and their client’s future financial reporting quality. These findings highlight the usefulness of industry peer firms’ filing information to auditors in the SEC review process and provide significant implications for managers, regulators, and auditors with regard to the review process. The second study investigates the effect of information search effort by the acquirer’s auditor on post-M&A audit quality. I predict and find greater M&A-related information search effort by the acquirer’s auditor through accessing the target firm’s filings is associated with better post-acquisition audit quality. This effect is more pronounced when the acquirer’s auditor has less M&A experience, when the target firm has a lower analyst following, and when the deal value is greater. Further evidence also shows the auditor information search effort is associated with better audit efficiency. These findings inform managers, audit firms, and other stakeholders by showing that the information search effort on the target firm’s filings by the acquirer’s auditor improves post-M&A audit quality, which has been an issue of concern to these stakeholders.