TY - JOUR
T1 - The role of incentives to manage earnings and quantification in auditors' evaluations of management-provided information
AU - Anderson, Urton
AU - Kadous, Kathryn
AU - Koonce, Lisa
PY - 2004/3
Y1 - 2004/3
N2 - We conducted an experiment with 113 experienced auditors to examine the influence of two factors on the persuasiveness of a management-provided nonerror explanation for an unexpected fluctuation in revenue. We expected that auditors' evaluations of a management explanation would depend jointly on whether it is quantified (i.e., put into numbers) and the managers' incentives to manage earnings. Instead, we find that the persuasiveness of managers' explanations is determined solely by their incentives. Focus on managers' incentives is consistent with auditors attending to regulators' recent concerns about earnings management. However, such a focus implies that when the likelihood of earnings management appears low, auditors fail to take into account information about sufficiency that is contained in the quantified explanation when they revise their planning judgments.
AB - We conducted an experiment with 113 experienced auditors to examine the influence of two factors on the persuasiveness of a management-provided nonerror explanation for an unexpected fluctuation in revenue. We expected that auditors' evaluations of a management explanation would depend jointly on whether it is quantified (i.e., put into numbers) and the managers' incentives to manage earnings. Instead, we find that the persuasiveness of managers' explanations is determined solely by their incentives. Focus on managers' incentives is consistent with auditors attending to regulators' recent concerns about earnings management. However, such a focus implies that when the likelihood of earnings management appears low, auditors fail to take into account information about sufficiency that is contained in the quantified explanation when they revise their planning judgments.
KW - Analytical procedures
KW - Earnings quality
KW - Management-provided information
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U2 - 10.2308/aud.2004.23.1.11
DO - 10.2308/aud.2004.23.1.11
M3 - Article
AN - SCOPUS:3142545250
SN - 0278-0380
VL - 23
SP - 11
EP - 27
JO - Auditing
JF - Auditing
IS - 1
ER -