Earnings Management and Investor Protection: An International Comparison

We define higher audit quality as greater assurance of high financial reporting quality. Researchers use many proxies for audit quality, with little guidance on choosing among them. We provide a framework for systematically evaluating their unique strengths and weaknesses. Because it is inextricably intertwined with financial reporting quality, audit quality also depends on firms’ innate characteristics and financial reporting systems. Our review of the models commonly used to disentangle these constructs suggests the need for better conceptual guidance. Finally, we urge more research on the role of auditor and client competency in driving audit quality.

A Review of Archival Auditing Research

https://www.dejongeaccountants.nl/wp-content/uploads/2014/09/1-s2.0-S0165410114000536-main.pdf

A review of archival auditing research

We review recent literature on the role of financial reporting transparency in reducing governance-related agency conflicts among managers, directors, and shareholders, as well as in reducing agency conflicts between shareholders and creditors, and offer researchers some suggested avenues for future research. Key themes include the endogenous nature of debt contracts and governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the heterogeneous nature of the resulting governance and debt contracts. We also emphasize the role of a commitment to financial reporting transparency in facilitating informal multi-period contracts among managers, directors, shareholders, and creditors.

/pdf/the-role-of-information-and-financial-reporting-in-corporate-50nxv9rcoq.pdf

The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1025&context=accounting_papers

The role of information and financial reporting in corporate governance and debt contracting

This paper examines the ex post and ex ante benefits of accounting conservatism to lenders and borrowers in the debt contracting process. I expect conservatism to benefit lenders ex post through the timely signaling of default risk, as manifested by accelerated covenant violations, and to benefit borrowers ex ante through lower initial interest rates. Consistent with these predictions, I find that more conservative borrowers are more likely to violate debt covenants following a negative price shock, and that lenders offer lower interest rates to more conservative borrowers.

/pdf/the-contracting-benefits-of-accounting-conservatism-to-2vrslkjw0w.pdf

The Contracting Benefits of Accounting Conservatism to Lenders and Borrowers

https://msbfile03.usc.edu/digitalmeasures/jieying/intellcont/jae775-1.pdf

The contracting benefits of accounting conservatism to lenders and borrowers

We study the stock and audit market effects associated with a widely publicized accounting scandal involving a public company (ComROAD AG) and a large, reputable audit firm (KPMG) in a country (Germany) that has long provided auditors with substantial protection from shareholder legal liability. We use this event to study whether an auditor's reputation helps to ensure audit quality, a rationale for which recent literature and events provide scant support. Given the absence of a strong insurance rationale for audit quality, Germany permits a relatively clean test of whether auditor reputation matters. We find that KPMG's clients sustain negative abnormal returns of 3% at events pertaining to ComROAD, and that these returns are more negative for companies that are likely to have higher demands for audit quality. We also find an increase in the number of clients that drop KPMG in the year of the ComROAD scandal (mostly smaller, recently public companies that are similar to ComROAD). Overall, our results provide support for the reputation rationale

Jieying Zhang

Papers

A Review of Archival Auditing Research

A review of archival auditing research

The Contracting Benefits of Accounting Conservatism to Lenders and Borrowers

The contracting benefits of accounting conservatism to lenders and borrowers

Does Auditor Reputation Matter? The Case of KPMG Germany