Do Analysts and Auditors Use Information in Accruals?

Abstract

Existing research indicates that firms with high accruals are more likely to experience future earnings problems, but that investors' expectations, as reflected in stock prices, do not appear to anticipate these problems. In this paper, we directly examine the published opinions of two types of professional investor intermediaries to see if they provide investors with information concerning the future earnings problems experienced by firms with high accruals. First, we examine the earnings forecasts of sell‐side analysts. We show that analysts' earnings forecasts do not incorporate the predictable future earnings declines associated with high accruals. Second, we examine the behavior of independent auditors. We find no evidence that auditors signal the future earnings problems associated with high accruals through either their audit opinions or through auditor changes. Overall, our evidence indicates that analysts and auditors do not alert investors to the future earnings problems associated with high accruals, thus corroborating previous findings that investors do not appear to anticipate these problems.

Audit tenure and audit Qualifications in a low litigation risk setting: An analysis of the Spanish market

“…On the contrary, Francis and Krishnan (1999) and Butler et al (2004) supported a negative relationship between both variables. Finally, Reynols and Francis (2000), Bradshaw et al (2001), and Johl et al (2007) observed a positive effect of company size on the probability of a receiving a qualified report.…”

“…Nevertheless, the available evidence is not conclusive. Although Francis and Krishnan (1999), Bartov et al (2000) and Butler et al (2004) concluded that financial leverage increased the likelihood of a qualified audit report, Bradshaw et al (2001) and Johl et al (2007) failed to report a significant relationship between financial leverage and audit qualifications.…”

“…High levels of accruals have been associated to high levels of earnings management and therefore to poor accounting quality. In the investigation of the relationship between accounting quality and audit qualifications, Francis and Krishnan (1999) and Bradshaw et al (2001) use the firm's total accruals as the proxy of accounting quality. Similarly, Myers et al's (2003) research about the effects of audit tenure on accounting quality uses total accruals as an indicator of the quality of accounting.…”

A Comparison of Investors’ and Analysts’ Biases in Interpreting Book-Tax Difference: Evidence from Korean Stock Market

“…Prior studies mentioned that investors and analysts are systematically biased in interpreting some financial accounting information (Abarbanell and Bushee 1997;Fairfield and Yohn 2001;Mendenhall 1991;Bradshaw, Richardson, and Sloan 2001;Ahmed, Nainar, and Zhou 2005). Accordingly, some studied relative comparison of the systematic biases between the two groups.…”

“…In the meantime, prior studies on finance and accounting also empirically analyzed whether analysts, who are also considered as the information intermediaries of the stock market, can effectively interpret the financial accounting information (Abarbanell and Bushee 1997;Bradshaw, Richardson, and Sloan 2001;Ahmed, Nainar, and Zhou 2005). Moreover, Weber (2009) concluded from his empirical analysis of the U.S. firms that investors properly reflect BTD under a good information environment, while analysts overly reflect BTD in future earnings forecasts.…”