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Determinants and Consequences of Quantitative Critical Accounting Estimate Disclosures

The Securities and Exchange Commission (SEC) recommends that firms provide MD&A disclosures quantifying the earnings effect of reasonably likely changes in critical accounting estimates (quantitative CAE). This paper examines the determinants and consequences of quantitative CAE. We find that qu...

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Published in:The Accounting review 2019-09, Vol.94 (5), p.189-218
Main Authors: Glendening, Matthew, Mauldin, Elaine G., Shaw, Kenneth W.
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Language:English
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description The Securities and Exchange Commission (SEC) recommends that firms provide MD&A disclosures quantifying the earnings effect of reasonably likely changes in critical accounting estimates (quantitative CAE). This paper examines the determinants and consequences of quantitative CAE. We find that quantitative CAE are negatively associated with management's incentives to misreport (proxied by portfolio vega) and positively associated with audit committee accounting expertise and with audit offices with multiple quantitative CAE clients. These findings hold for the presence, initiation, number, and magnitude of quantitative CAE, and for both pension and non-pension quantitative CAE. We also find that incidences of AAERs, misstatements, and small positive earnings surprises decrease after initiation of quantitative CAE. Collectively, our findings provide insight into the use of quantitative disclosure to inform users about accounting estimation uncertainty in financial reports. JEL Classifications: M41; M42; M48. Data Availability: Data are available from the public sources cited in the text.
doi_str_mv 10.2308/accr-52368
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source International Bibliography of the Social Sciences (IBSS); Business Source Ultimate
subjects Accounting
Audit committees
Audits
Earnings
Experts
Financial disclosure
Financial reporting
Incentives
Uncertainty
title Determinants and Consequences of Quantitative Critical Accounting Estimate Disclosures
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