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Apparent audit failures and value relevance of earnings and book value

Apparent audit failures and value relevance of earnings and book value Purpose – The purpose of this paper is to examine the value relevance of accounting information in cases of apparent audit failures. Design/methodology/approach – The authors adopt the bootstrapping technique and compare the value relevance of key accounting information across samples of firms experiencing apparent audit failures with matched non‐audit failure firms. Findings – Accounting information is found to be less value relevant for firms experiencing apparent audit failures, regardless of auditor reputation. Research limitations/implications – This study has limitations due to the ex ante research approach adopted. Future research could address this issue by possibly incorporating an “intervening” factor into the model to indicate how the market can differentiate audit failure firms from other firms. Originality/value – The paper gives support to the assertion that the market appears to rely less on accounting numbers when audit failures occur, even though formal allegations of audit failure may not appear until years after their occurrence. In addition to contributing to value‐relevance research by providing empirical evidence for the market phenomenon around the time of material misstatements, the paper demonstrates an innovative application of bootstrapping to test for differences in R 2 . http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting and Finance Emerald Publishing

Apparent audit failures and value relevance of earnings and book value

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References (40)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1475-7702
DOI
10.1108/14757701111129616
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine the value relevance of accounting information in cases of apparent audit failures. Design/methodology/approach – The authors adopt the bootstrapping technique and compare the value relevance of key accounting information across samples of firms experiencing apparent audit failures with matched non‐audit failure firms. Findings – Accounting information is found to be less value relevant for firms experiencing apparent audit failures, regardless of auditor reputation. Research limitations/implications – This study has limitations due to the ex ante research approach adopted. Future research could address this issue by possibly incorporating an “intervening” factor into the model to indicate how the market can differentiate audit failure firms from other firms. Originality/value – The paper gives support to the assertion that the market appears to rely less on accounting numbers when audit failures occur, even though formal allegations of audit failure may not appear until years after their occurrence. In addition to contributing to value‐relevance research by providing empirical evidence for the market phenomenon around the time of material misstatements, the paper demonstrates an innovative application of bootstrapping to test for differences in R 2 .

Journal

Review of Accounting and Finance – Emerald Publishing

Published: May 17, 2011

Keywords: Auditing; Accounting information; Earnings

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