This study examines how voluntary sustainability disclosure strategy and thirdparty assurance jointly affect ESG investors' judgments. In a 3×2 experiment, nonprofessional ESG investors evaluate a firm's sustainability report that varies disclosure strategy (unbalanced, balanced, or balanced resolution) and voluntary assurance (absent or present). We find that unfavorable sustainability information lowers perceived sustainability performance and investment willingness when management provides balanced rather than unbalanced disclosure containing only favorable information. Voluntary assurance increases investment when disclosure is balanced, consistent with assurance tempering the negative sustainability performance inferences from unfavorable information, but does not eliminate the penalty associated with balanced disclosure. We also find that forward-looking resolution disclosure increases investment when assurance is absent, suggesting that assurance and remediation disclosures serve partially substitutive roles. Supplemental analyses indicate investor motivation shapes these effects. Our findings inform sustainability disclosure, voluntary assurance, and investor judgment research and offer practical insights for firms evaluating sustainability reporting strategies.

Agents often inflate measured performance by distorting operating decisions (e.g., real earnings management) and/or reporting decisions (e.g., accruals management). Across four studies, we find that public judgments of distortion's acceptability largely reflect assessments of how harmful and norm-violating the distortion is. Judgments of operating distortion primarily reflect assessments of harm, whereas judgments of reporting distortion primarily reflect assessments of norm violation. These results are consistent with the Theory of Dyadic Morality (Gray, Waytz, and Young 2012; Schein and Gray 2018). We also find that those who perceive an accounting system as more unfairly withholding an agent's bonus assess distortion (especially reporting distortion) to be less norm-violating. Those who perceive the performance measure as less appropriate for capturing the value of performance to stakeholders assess distortion (especially operating distortion) to be more harmful. Assessments of distortions' harm and norm violation explain a substantial portion of the variation in acceptability judgments.

We use a set of experiments to examine how a company's choice of assurance level (reasonable versus limited) affects nonprofessional investor confidence in sustainability information disclosed under two different reporting approaches (investor-oriented and broad-stakeholder) and how these choices contribute to investor-auditor expectation gaps. We find that nonprofessional investors distinguish limited from reasonable assurance, regardless of reporting approach. However, when we compare investor to auditor confidence, results reveal significant expectation gaps with limited but not reasonable assurance, suggesting investors fail to sufficiently adjust for the lower level of assurance that a limited-assurance engagement provides. These results are not sensitive to reporting approach. Our findings have implications for future research on ESG assurance, audit firms as they seek to expand their assurance services on sustainability disclosures, and policy makers around the world as they consider whether to mandate assurance over sustainability disclosures and, if so, at what level.

Purpose The purpose of this paper is to examine the impact hosting the Super Bowl has on audit completion and financial reporting timeliness for companies headquartered in Super Bowl hosting cities. Design/methodology/approach Using 16 years of financial reporting data, this study uses the Super Bowl and related activities, combined with required filings during “busy season,” as a natural experiment to examine how audit firms navigate short-term, exogenously imposed but anticipated, audit team capacity constraints. Findings Companies headquartered in a city hosting the Super Bowl, during busy season, have longer audit report lags (by approximately three days, in comparison to non-hosting busy season audits) and less timely securities and exchange commission (SEC) (10-K) filings. The authors find no evidence that Super Bowl hosting affects audit fees or earnings announcement timeliness. Practical implications When confronted with anticipated capacity shocks, audit firms take longer to complete the audit, absorbing the financial costs of the delay and maintaining audit quality, resulting in less timely financial reporting. Originality/value This study demonstrates the costs of Super Bowl-related inefficiencies and contributes to our understanding of how auditors navigate capacity shocks. This study provides evidence that auditors can effectively manage business risk and continue to facilitate providing timely and accurate information to financial statement users in the face of a capacity shock.

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The personality traits of narcissism, Machiavellianism, and psychopathy, collectively referred to as the "Dark Triad" (DT), have received meaningful attention in the accounting literature. This paper aims to help researchers digest the existing DT research in accounting and inform productive DT research going forward. Specifically, we present an operating, reporting, and assurance framework for analyzing how DT traits affect decisions in all stages of financial reporting, including auditing the financial statements. Our framework is of use to researchers interested in the effects of DT traits and other personality traits in a variety of accounting contexts.

Companies are under increasing pressure to manage their reputation on environmental, social, and governance (ESG) issues. Auditors are a potential source of ESG risk management expertise and assurance due to a deep understanding of their client’s ESG-related reputation risk (“ESG risk”) and their assurance reporting expertise. However, provision of nonaudit services by the external auditor is controversial and public accountants are still defining their role in ESG risk control and reporting. We explore whether auditors help companies manage heightened ESG risk in times of reputation crisis, using abnormal negative ESG-related media coverage as a measure of “tainted reputation.” Findings show a positive association between tainted reputation and nonaudit services and between the interaction of tainted reputation and nonaudit services with future firm value. The positive interaction persists when we consider a proxy for other ESG risk management activities in our analyses and for other measures of ESG risk management effectiveness (future stock returns and future tainted reputation). Subsample analyses indicate that results are driven by companies audited by ESG industry specialist auditors, that the association between tainted reputation and nonaudit services is driven by companies owned by institutional shareholders, and that inferences from our results may not hold when ESG risk is dominated by its social component. Using restatements as a proxy, we find no evidence to suggest that the interaction of tainted reputation and nonaudit services is associated with impaired audit quality. Findings demonstrate an empirical linkage between tainted reputation and nonaudit services that is positively associated with future firm value measures.

In three studies totaling almost 5000 subjects, we present respondents with scenarios in which employees manage performance measures by distorting how they report performance or how they operate their organizations. We measure respondents’ judgments about the scenarios and their broader moral values, and interpret statistical associations in light of Moral Foundations Theory (Graham, Nosek, et al 2011) to draw inferences on how respondents view the ‘moral terrain’ of morally-relevant features depicted by the scenarios we present. In our business, public school and hospital settings, we conclude that respondents see reporting distortion as a more appropriate remedy than operating distortion to inequity, and see operational distortions as improving underlying performance more effectively when measures capture true performance more accurately. In our public school and hospital settings, we also conclude that respondents see the organization, (i.e. school or hospital), rather than outside stakeholders, (i.e. students or patients), as representing the in-group to which managers owe loyalty. Respondents also see a sacred element both in reporting and in supporting a school or hospital.

ABSTRACT We investigate whether and how a “critical audit matter” (CAM) disclosure affects managers' real operating decisions in two contexts (issuing a loan that decreases versus increases the average risk profile of loan portfolios, or choosing to hedge versus speculate on commodity risk). We expect that a CAM disclosure increases disclosure costs and implies expanded auditor support for both types of activities, but we expect implied auditor support to be valued more highly for risk-increasing than for risk-decreasing activities. As a result, we predict that a CAM disclosure decreases managers' risk-decreasing activities (due to increased disclosure costs) more than managers' risk-increasing activities (as the implied auditor support counteracts the increased disclosure costs). We find evidence consistent with our prediction across multiple experiments. Our study sheds light on the unintended consequences of a CAM disclosure and provides insight to relevant parties as the new standard goes into effect.

PurposeThis study aims to explore the effect of negotiating audit differences on auditors’ internal control deficiency (ICD) severity assessments, an ensuing, non-negotiated judgment, in an integrated audit.Design/methodology/approachThe experiment manipulates the client’s concession timing strategy as either immediate or gradual, holding the outcome constant. A total of 34 auditors (primarily managers) resolve an audit difference with the client.FindingsThe client’s concession timing strategy during the negotiation of an audit difference spills over to affect auditors’ severity assessment of a related ICD. Auditors judged the ICD severity to be higher (lower) in the immediate (gradual) condition. Client retention risk inferences mediate this effect.Research limitations/implicationsThe effect on auditors’ ICD severity assessments may not ultimately affect the audit report. Participants did not control their negotiation strategy, allowing the client’s negotiation strategy and the outcome to be held constant; it is possible that interactive effects between the client and auditor’s strategy might affect the study’s implications.Practical implicationsFeatures of the auditor–client negotiation process may influence auditors’ downstream, post-negotiation judgments and may therefore help to explain empirical evidence and Public Company Accounting Oversight Board inspection findings that show auditors often fail to identify an internal control material weakness after identifying a financial statement misstatement.Originality/valueThis paper expands current negotiation research by exploring the impact of inferences made based on counterparty concession strategy for downstream, non-negotiated judgments and current integrated audit research by identifying client retention perceptions as a driving factor of lower ICD severity assessments.

ABSTRACTAuditing standards task auditors with collecting sufficient appropriate evidence to form audit judgments. Yet, cognitive psychology documents a robust finding in which people evaluate a bundle of relevant, directionally consistent evidence as though averaging the strength of the components. In consequence, a bundle of evidence may be viewed as weaker evidence than the bundle's strongest evidence item alone. We experimentally examine whether this averaging effect occurs in an audit context, and we test a potential moderator. In three independent mini‐cases, we ask auditor participants to make judgments about going concern, internal controls, and fraud risk. We present auditors with unfavorable audit evidence relevant to each judgment, manipulating whether we present a single strong evidence item or bundle it with a weaker evidence item. We also manipulate the auditor's initial impression of the client's state. We find that experienced auditors succumb to the averaging effect, making more strongly unfavorable judgments in response to the single evidence item than the bundle, and that this bias is reduced when the observed evidence is inconsistent with the auditor's initial impression. We interpret our results as consistent with the dual‐processing theory of cognition.

ABSTRACT Workpaper review is an important quality control mechanism in the audit environment. However, appropriately responding to review notes is not commonly taught. The Sprandel, Inc. case provides a hands-on learning experience for students to connect textbook audit knowledge through use of an activity regularly performed in audit practice: closing review notes. Through the process of closing review notes, students practice auditing accounts receivable, including performing audit procedures related to internal controls and substantive audit work. The case also provides students with an opportunity to use Excel to complete electronic workpapers and to document their audit procedures. Further, the case requires students to use critical-thinking skills and apply professional skepticism when performing audit procedures, evaluating audit evidence, and making decisions. Finally, this case helps students understand how auditing standards apply to the procedures performed during an audit of accounts receivable. The case is designed for auditing courses at the undergraduate or graduate level.

ABSTRACT: We explore potential effects of a new Public Accounting Oversight Board (PCAOB) rule that requires disclosure of the external audit partner's identity. By manipulating the presence or absence of audit partner disclosure (APD), we examine how investors might react to APD and the mechanism behind such reaction. We find that prospective investors are less likely to invest in a peer firm linked to a restating firm via APD than when the link is only through an audit firm and industry. This effect is mediated by investors' restatement likelihood assessments. Our study makes several contributions. First, we add empirical evidence to the emerging debate on the impact of APD to U.S. markets. Second, we experimentally demonstrate investor information contagion and provide support for one mechanism (speculated by archival-based literature) through which it works. Finally, we provide evidence that investors attribute more blame to partners for a negative outcome due to APD. JEL Classifications: M42; M48.

Auditing standards task auditors with collecting sufficient appropriate evidence to form audit judgments. Yet cognitive psychology documents a robust finding in which people evaluate a bundle of relevant, directionally consistent evidence as though averaging the strength of the components. In consequence, a bundle of evidence may be viewed as weaker evidence than the bundle’s strongest evidence item alone. We experimentally examine whether this averaging effect occurs in an audit context, and we test a potential moderator. In three independent mini-cases, we ask auditor participants to make judgments about going concern, internal controls, and fraud risk. We present auditors with unfavorable audit evidence relevant to each judgment, manipulating whether we present a single strong evidence item or bundle it with a weaker evidence item. We also manipulate the auditor’s initial impression of the client’s state. We find that experienced auditors succumb to the averaging effect, making more strongly unfavorable judgments in response to the single evidence item than the bundle, and that this bias is reduced when the observed evidence is inconsistent with the auditor’s initial impression. We interpret our results as consistent with the dual-processing theory of cognition.

Across four studies, we show that public attitudes toward earnings management are mediated by perceptions of its deceptiveness, rule-breaking, and harm. Reporting distortion (RD, like accruals management) is seen as more deceptive and rule-breaking, while operating distortion (OD, like real earnings management) is seen as more harmful. We replicate the tendency for people to see RD as less acceptable than OD, but only in a sales setting similar to prior work. This view flips in a healthcare setting, in which the harm of OD (delaying patient care) is more severe. We also show that distortion’s acceptability, and the difference in acceptability between RD and OD, are both moderated by the perceived deservingness of the distorter and the quality of the measure being distorted, because deservingness makes RD seem relatively less deceptive and rule-breaking, while measure quality makes OD seem relatively less harmful. We draw implications for practice and future research.

SUMMARY: Recent changes in the audit and financial reporting environment have resulted in longer audit report lags and have increased the importance of identifying factors associated with a timely audit. We examine timeliness implications of office-specific attributes of the audit firm. Specifically, we examine whether office-specific industry expertise, office size, and the importance of the client to the local office are associated with audit delay (i.e., the time between fiscal year-end and the audit report date). We explore the sensitivity of our results to various measures and consider the impact of earnings quality. We examine two types of industry expertise and whether the aforementioned audit firm attributes are associated with a propensity to issue an early earnings announcement. We find that office-specific industry expertise is negatively associated with audit delay (for all but the largest quartile of firm offices) while office size and client importance are both positively associated with audit delay; however, the most important clients are associated with a more timely audit. Office-specific industry expertise is positively associated with the propensity to announce earnings substantially early and such expertise garnered via a product-specialist strategy is positively associated with audit delay relative to a low-cost specialist strategy. Our study provides further support for the importance of office-specific characteristics on audit and financial reporting outcomes and provides evidence of the benefit of office-specific industry expertise.

Although the Sarbanes-Oxley Act of 2002 imposes internal control disclosure and certification requirements on management, regulators are concerned that companies are not disclosing material internal control weaknesses on a timely basis. This study investigates whether litigation risk could act as a mechanism to incentivize timely material weakness disclosure. Examining material weakness and restatement disclosures from 2003 – 2011, we find that restatement-related litigation is significantly greater for firms with material weakness disclosures regardless of when the material weakness was disclosed (i.e., during the misstated time period or following the restatement announcement). In fact, we find that over 75 percent of lawsuits allege that management falsely certified internal controls regardless of whether the material weakness was disclosed during or after the misstated time period. While we do not find evidence that internal control-related arguments are associated with the resolution of litigation, our results generally indicate that SOX-mandated internal control certifications are increasing litigation costs without providing management with an incentive to disclose material weaknesses on a timely basis.