Melbourne Accounting Research Seminar - Kris Allee

Kris Allee from the University of Arkansas will present a MARS seminar.

Topic: Audit Adjustments Around Financial Benchmarks

Abstract: Using pre- and post-audit financial statements, we show that auditors are less likely to require downward adjustments for firms that slightly beat earnings targets. Consistent with economic bonding between auditors and their clients, we document that this pattern is more evident when auditors and clients form a more cohesive economic bond. Auditors also appear to consider their clients’ economic incentives to meet or beat the benchmarks in their audit decisions when economic bonds are stronger. Furthermore, we document novel evidence that auditors’ less restrictive adjustments around the benchmark are concentrated on discretionary and less reliable accrual items. Overall, we find robust evidence that auditors require asymmetric adjustments around earnings targets.

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