Does Mandated Audit Communication Reduce Opportunistic Corrections to Manage Earnings to Forecasts?

• Published in: The Accounting review Vol. 75; no. 4; pp. 383 - 404
• Main Authors: Libby, Robert, Kinney, William R.
• Format: Journal Article
• Language: English
• Published: Menasha, Wis American Accounting Association 01.10.2000
• Subjects: Accounting; Analytical forecasting; Audit committees; Auditing; Auditing standards; Audits; Business; Business accounting; Communication audits; Earnings; Earnings forecasting; Financial audits; Financial economics; Financial management; Financial reporting; Forecasting standards; Forecasts; Hypotheses; Management audits; Opportunistic behavior; Regulation; Statistical forecasts; Studies; United States > US
• ISSN: 0001-4826; 1558-7967
• DOI: 10.2308/accr.2000.75.4.383

This paper reports two experiments in which Big 5 audit managers estimate reported (audited) earnings conditional on analysts' consensus forecast, auditing standards, and auditor discovery of a quantitatively immaterial earnings overstatement. We find that auditors judge overstatement correction less likely if it would cause a missed forecast, even for objectively measured misstatements. This behavior is consistent with SEC Chairman Levitt's concerns about opportunistic corrections to manage earnings to forecasts. Also, SAS No. 89's mandated representations and communications do not increase corrections that would cause a missed forecast, indicating that the Auditing Standards Board has limited ability to reduce opportunistic corrections through such regulations.