Melbourne Accounting Research Seminar - Linda Myers

Melbourne Accounting Research Seminars
Melbourne Accounting Research Seminars

Professor Linda Myers from the University of Tennessee Knoxville will present a MARS seminar.

Topic: To Combine or Not to Combine? Integrated Audit Reporting and Internal Control Material Weakness Opinions

Abstract:  Large public companies are required to obtain integrated audits of internal control over financial reporting and financial statements. The lack of guidance regarding how auditors should decide whether to issue combined versus separate reports on these audits suggests that these decisions are perceived as largely benign, but it is unclear whether this is the case. We find that separate audit reports are significantly more likely when clients receive material weakness opinions (MWOs), effectively decoupling details about factors giving rise to the MWO and the financial statement audit report. Cross-sectional tests reveal that the negative association between MWOs and combined audit reports is more pronounced in the presence of poor monitoring – when the client has a lower proportion of institutional investors, lower analyst following, and is more economically important to the auditor. It is weaker in the presence of strong monitoring – when there is more accounting expertise on the client’s audit committee, when the client engages a Big 4 auditor, and when the auditor is an industry specialist. We also find that Big 4 and industry specialist auditor decisions to combine audit reports in MWO years indicate higher client misstatement risk. In addition, the market response to good earnings news is less positive when a material weakness is disclosed in a combined, rather than separate, audit report. Lastly, for clients that already receive separate reports prior to a MWO, we find that the two reports are less proximate and are less likely to be adjacent in MWO-year filings relative to the preceding year’s non-MWO filing. Collectively, these results suggest that client management strategically influences the audit report format. Our findings should be of interest to academics, practitioners, and regulators, and suggest that additional guidance surrounding combined versus separate reporting may be helpful.

This seminar will be conducted face to face in the Department of Accounting. Register for this seminar

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