Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis

Audited financial reporting and voluntary disclosure: International evidence on management earnings forecasts

“…As a result, mechanisms by which managers can signal the truthful disclosure of private information are important to both managers and market participants (Hirst, Koonce, & Venkataraman, 2007). Ball et al (2012) argue that an important firm-level mechanism by which managers can signal truthful disclosure of private information, and thereby increase the perceived credibility of management earnings forecasts, is through commitment to higher levels of audited financial reporting. The rationale underlying this argument is that audited financial reporting provides confirmation of the voluntary earnings forecasts issued by firms ex post.…”

“…7 We exclude countries/regions that lack the countryyear-level institutional variables used in our study. We further exclude the USA from our analysis, because the purpose of our study is to extend prior studies showing a link between audited financial reporting and voluntary disclosure within a US setting to a global setting (e.g., Ball et al, 2012;Krishnan et al, 2012). 8 We also exclude Japan, because management earnings forecasts in Japan are de facto mandatory (Kato, Skinner, & Kunimura, 2009 In addition, recent research shows that an increasing number of firms tend to issue management earnings forecasts together with their earnings announcements (e.g., Lansford, Lev, & Tucker, 2013;Merkley, Bamber, & Christensen, 2013;Rogers & Van Buskrik, 2013).…”

“…Given research indicating that Big 4 auditors provide higher quality audits, and that the decision to hire a Big 4 auditor represents a firm's commitment to better financial reporting quality, both in the USA and globally (Choi & Wang, 2007;Francis, Maydew, & Sparks, 1999;Francis & Wang, 2008;Guedhami, Pittman, & Saffar, 2014), our first measure of audit commitment is the choice of a Big 4 auditor (Big4Auditor) made by a firm in a given year. 9 In addition, following previous studies (e.g., Ball et al, 2012;Chen et al, 2016), we use the amount of total actual audit fees (AuditFee) and excess audit fees (ExcessFee) to measure a firm's commitment to higher levels of audit verification.…”

“…Excess audit fees represent audit fees that are incremental to those associated with previously identified determinants of audit fees. In particular, it constitutes the residual from the regression of audit fees (AuditFee) on firm-level audit fees' determinants, as summarized by Ball et al (2012). These determinants are (1) a variable controlling for firm size, the log of total assets (LnAssets); (2) variables controlling for audit complexity, including total accruals scaled by total assets (Accruals), the ratio of current assets to total assets (Current), the ratio of foreign sales to total sales (Foreign), and the number of business segments (Segment);…”

“…Given the variations in the number of financial statements mandated by the disclosure requirements of each country and the subsequent earnings announcements issued by firms from different countries, we believe that our study has implications for global regulators and policy-makers when setting disclosure requirements. 3 Second, studies have shown that commitment to higher levels of audit verification is positively related to firms' voluntary disclosure practices (e.g., Ball et al, 2012;Chen, Srinidhi, Tsang, & Yu, 2016). Although studies have shown the importance of firm-level credibility-enhancing mechanisms in affecting the perceived informativeness of voluntary disclosure, which in turn has an effect on managers' voluntary disclosure incentives, evidence from a single country such as the USA provides limited insight into whether such a finding can be generalized to other countries.…”