Proactive Financial Reporting Enforcement: Audit Fee and Financial Reporting Quality Effects

Florou, Annita; Morricone, Serena; Pope, Peter F.

doi:10.2139/ssrn.2878891

Cited by 5 publications

(2 citation statements)

References 44 publications

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“…Under this view, primarily the direct costs of enforcement limit its desirability. Recent papers by Christensen, Liu, and Maffett [] and Florou, Morricone, and Pope [] find support for high costs of enforcement to firms, exploiting a change of the enforcement by the Financial Reporting Review Panel in the United Kingdom. Christensen, Liu, and Maffett [] find that stronger enforcement reduces shareholder wealth.…”

Section: Introductionmentioning

confidence: 99%

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Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality

Ewert

Wagenhofer

2019

J of Accounting Research

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A widely held assumption in policy making and empirical research is that increasing the strength of public enforcement improves financial reporting quality and audit quality. This paper provides a more nuanced view. In a model with a manager who can manage earnings, a strategic auditor, and an enforcement institution, we show that enforcement and auditing are complements in a weak enforcement regime but can be substitutes in a strong regime. Although stronger enforcement always mitigates earnings management, the effects of different instruments of strengthening enforcement are ambiguous. We show that they can improve or impair financial reporting quality and audit quality, depending on production risk, accounting system characteristics, and the scope of auditing relative to enforcement.

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Section: Introductionmentioning

confidence: 99%

“…Christensen, Liu, and Maffett [] find that stronger enforcement reduces shareholder wealth. Florou, Morricone, and Pope [] document that stronger enforcement increases audit effort, risk, and fees, particularly for firms listed on the Alternative Investment Market.…”

Section: Introductionmentioning

confidence: 99%