Do High-Quality Auditors Improve Non-GAAP Reporting?

Z.A. Feng*, J.R. Francis, Y.W. Shan, S.L. Taylor

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Prior research finds that clients of high-quality auditors report higher-quality GAAP earnings. We extend this research to investigate whether auditor quality is associated with the quality of voluntarily disclosed non-GAAP earnings measures. Using a sample of Australian firms disclosing annual non-GAAP metrics, we find that clients of high-quality auditors are more likely to voluntarily disclose non-GAAP earnings numbers. However, clients of high -quality auditors make adjustments in calculating non-GAAP earnings (non-GAAP exclusions) that are less predictive of future earnings and less value relevant than those of other firms. These results indicate that their adjustments are of higher quality. We also find similar results for U.S. firms using a sample of quarterly non-GAAP earnings disclosures. Overall, our evidence indicates that commonly used indicators of audit quality for GAAP reporting are positively associated with the quality of voluntarily disclosed non-GAAP earnings measures.
Original languageEnglish
Pages (from-to)215-250
Number of pages36
JournalAccounting Review
Volume98
Issue number1
DOIs
Publication statusPublished - 1 Jan 2023

JEL classifications

  • j33 - "Compensation Packages; Payment Methods"
  • m41 - Accounting

Keywords

  • non-GAAP disclosures
  • Big 4 auditors
  • industry specialization
  • INDUSTRY EXPERTISE
  • PRO FORMA
  • EARNINGS QUALITY
  • VOLUNTARY DISCLOSURE
  • VALUE-RELEVANCE
  • BIG 4
  • MANAGERS
  • SPECIALIZATION
  • REPUTATIONS
  • PROXIES

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