The Consequences of Audit‐Related Earnings Revisions

• Published in: Contemporary accounting research 2017-12, Vol.34 (4), p.1880-1914
• Main Authors: Haislip, Jacob Z., Myers, Linda A., Scholz, Susan, Seidel, Timothy A.
• Format: Article
• Language: English
• Subjects: Auditor changes; Auditors; Audits; Client satisfaction; Dismissal; Earnings; Earnings announcements; Fees & charges; Graves; Revisions; Rotation; Turnover; Unaudited financial statements
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/1911-3846.12346

In this study, we investigate the consequences that auditors and their clients face when earnings announced in an unaudited earnings release are subsequently revised, presumably as a result of year‐end audit procedures, so that earnings as reported in the 10‐K differ from earnings as previously announced. Specifically, we examine whether the likelihood of an auditor “losing the client” is greater following such revisions, and whether the likelihood of dismissal is influenced by revisions that more negatively impact earnings, that cause the client to miss important earnings benchmarks, by greater local auditor competition, or by auditor characteristics. We also examine audit pricing subsequent to audit‐related earnings revisions for evidence of pricing concessions to retain the client. Finally, we examine whether client executives experience a greater likelihood of turnover following an audit‐related earnings revision. Consistent with expectations, we find that auditor dismissals are more likely following audit‐related earnings revisions. We also find that dismissals are more likely when revisions cause clients to miss important benchmarks and when there is greater local auditor competition. Among nondismissing clients, we find that future audit fees are lower when the effect of the revision on earnings is more negative, consistent with auditors offering price concessions to retain clients when revisions are more displeasing. We also find a greater likelihood of future chief financial officer (CFO) turnover as the effect of the revision worsens. Our findings offer important insights into the consequences that auditors face when balancing their responsibility for high audit quality and client satisfaction, as well as into the consequences that CFOs face when releasing inflated but not fully audited earnings. Les conséquences des révisions de résultats liées à l'audit Les auteurs s'intéressent à la situation où les résultats non audités annoncés dans un communiqué sont subséquemment révisés, vraisemblablement à la suite de l'application des procédures d'audit de fin d'exercice, les résultats indiqués dans le formulaire 10‐K étant ainsi différents des résultats précédemment publiés, et ils analysent les conséquences de cette situation pour les auditeurs et leurs clients. Ils se demandent plus précisément si la probabilité qu'un auditeur « perde le client » est plus élevée à la suite de telles révisions et si la probabilité de révocation du mandat de l'auditeur