Article2000

Auditor Quality and the Accuracy of Management Earnings Forecasts

79 citations0/0 files storedContemporary Accounting Research

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Auditing, Earnings Management, Governance Forecasting Techniques and Applications Corporate Governance and Financial Management

Abstract

Abstract In this study, we appeal to insights and results from Davidson and Neu 1993 and McConomy 1998 to motivate empirical analyses designed to gain a better understanding of the relationship between auditor quality and forecast accuracy. We extend and refine Davidson and Neu's analysis of this relationship by introducing additional controls for business risk and by considering data from two distinct time periods: one in which the audit firm's responsibility respecting the earnings forecast was to provide review‐level assurance, and one in which its responsibility was to provide audit‐level assurance. Our sample data consist of Toronto Stock Exchange (TSE) initial public offerings (IPOs). The earnings forecast we consider is the one‐year‐ahead management earnings forecast included in the IPO offering prospectus. The results suggest that after the additional controls for business risk are introduced, the relationship between forecast accuracy and auditor quality for the review‐level assurance period is no longer significant. The results also indicate that the shift in regimes alters the fundamental nature of the relationship. Using data from the audit‐level assurance regime, we find a negative and significant relationship between forecast accuracy and auditor quality (i.e., we find Big 6 auditors to be associated with smaller absolute forecast errors than non‐Big 6 auditors), and further, that the difference in the relationship between the two regimes is statistically significant.

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References

1984The "Hot Issue" Market of 1980 1987Product Differentiation in Auditing: Auditor Choice in the Market for Unseasoned New Issues 1993A Note on the Association between Audit Firm Size and Audit Quality*1994The association between audit quality, retained ownership, and firm-specific risk in U.S. vs. Canadian IPO markets 1992The voluntary inclusion of earnings forecasts in IPO prospectuses*1992The Accuracy of Profits Forecasts in Initial Public Offering Prospectuses

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2008The Influence of Audit Firm Specialization on Analysts’ Forecast Errors 2006Assurance provided by auditors’ reports on prospective financial information: implications for the expectation gap 2017The Effects of Mandatory Audit Firm Rotation on Client Importance and Audit Industry Concentration 2017The role of the gender diversity of audit committees in modelling the quality of management earnings forecasts of initial public offers in Malaysia 2006Auditor Conservatism and Audit Quality: Evidence from IPO Earnings Forecasts 2004Simultaneous Signaling in IPOs via Management Earnings Forecasts and Retained Ownership: An Empirical Analysis of the Substitution Effect

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