We study the influence of perceived auditor quality on investment decisions by bond mutual fund investors. Audits of bond mutual funds require significant auditor expertise. Fund managers estimate daily the fair market values of holdings that are often opaque and illiquid. Managers can use their discretion to manipulate their fund's performance results. While it is known that investment flows into funds that report good past performance, little evidence exists about whether investors' confidence in the reliability of fund financial reports is influenced by auditor quality. Using hand‐collected data from SEC filings, we find that the positive association between reported performance and investment flows is stronger for funds with auditors who are industry specialists and are longer‐tenured, as well as for funds that pay higher audit fees. We do not find that auditor office size strengthens the association. We also find that the presence of industry‐specialist auditors, long‐tenured auditors, and higher audit fees lead to additional disclosure in the form of emphasis‐of‐matter. This study contributes to the streams of research investigating perceived audit quality, fund investment decisions, and auditing for financial services.

We examine how the partisan alignment between chief executive officers (CEOs) and the United States president influences corporate disclosure outcomes. We predict and find evidence that more partisan-aligned CEOs display greater optimism in their corporate disclosures. CEO partisan alignment is positively associated with the likelihood of issuing a management earnings forecast and issuing overly optimistic forecasts. More partisan-aligned CEOs also use a more optimistic tone in the corporate disclosure and exhibit a lower level of accounting conservatism. Our findings suggest that time-varying beliefs of CEOs formed by the political environment can shape corporate disclosures.

Consumers are increasingly conscientious of societal and environmental impacts of their purchases, prompting companies to make environmental, social, and governance (ESG) claims and engage in voluntary ESG assurance. However, prior literature lacks insight into whether consumers consider negative accounting news events (e.g., error/irregularity restatements) and their effects on purchasing intentions. Using real world consumers of sustainable goods, we investigate how varying levels of negative accounting news events (i.e., error or irregularity restatements), the presence of ESG product-quality assurance (e.g., cage free egg certification), and the type of assurance provider (e.g., an accounting firm that also audits the financial statements, an accounting firm that does not audit the financial statements, government agency) influence purchasing intentions and organizational legitimacy perceptions. We find that consumers surrogate negative accounting news events as indicators of ESG claim reliability, negatively impacting purchasing intentions, especially for more severe events (e.g., irregularity). However, ESG product-quality assurance partially mitigates these negative effects. Moreover, we find that when an error restatement occurs, the mitigating effect is less pronounced when the same firm provides both financial statement and ESG product-quality assurance compared to a governmental agency or non-financial statement auditor. Finally, when irregularities occur, though product-quality assurance partially mitigates the detrimental effects, there is no difference between assurance providers, likely because management's willingness to deceive auditors decreases the perceived reliability of assurance in general. Our results suggest boards should obtain ESG product-quality assurance and carefully select their assurance providers.

Although information technology (IT) plays an essential role in financial reporting, many companies today lack sufficient human capabilities to utilize IT competently. We examine the association between a firm's access to IT‐capable labor and financial reporting quality (FRQ). We proxy for access to IT‐capable labor using workforce measures in the metropolitan statistical area (MSA) where the firm operates, including (1) the number of IT‐related college degrees relative to the total active workforce, (2) the level of education of IT graduates, (3) the income level of IT graduates, and (4) a composite measure. We find that firms in MSAs with a higher IT‐competent labor force are associated with fewer financial reporting misstatements and internal control issues. This study contributes to the emerging literature stream examining the influence of geographic labor characteristics on firm‐level outcomes and the research on the impact of IT capability on financial reporting processes. We also inform the current movement of integrating IT knowledge into the education curriculum.

As audit technology becomes more widespread, practice and academia are raising concerns about the costs and benefits of these technologies. We examine how internal auditors use technology‐based audit techniques (TBATs) and how TBATs impact the efficiency and effectiveness of their audits. We use two surveys and interviews of individual auditors and chief audit executives (CAE) to examine their perceptions of TBATs. Auditors perceive TBATs as beneficial. Specifically, an increase in the use of TBATs is associated with completing more audits, finding more risk factors, providing more recommendations, and decreasing audit days. However, CAEs also perceive TBATs to be costly. An increase in the use of TBATs is associated with an increase in the size of the internal audit function. Finally, interviews with CAEs suggest that TBATs are not used more often because of difficulties in quantifying their benefits, observing their benefits in a timely manner, and hiring auditors with appropriate skills. Overall, TBATs stand to increase the efficiency and effectiveness of audit tasks, but auditors struggle to quantify their net cost‐benefit tradeoff. Our findings validate the issues raised by both proponents and opponents of audit technologies and help provide empirical data to inform their decision‐making process regarding the future of these tools. Additionally, our study prompts several avenues for future research that can help inform regulators, practitioners, and researchers on how these technologies are impacting the auditing profession.

In this paper, we investigate how auditors respond to shareholder activism against their clients. Our study is important because activism may be viewed by auditors as a source of increased engagement risk, thereby impacting audit outcomes. The potential relationship between shareholder activism and audit outcomes leads us to predict that activism targets will pay higher audit fees and also will be more likely to receive adverse internal control opinions (ICOs) and first‐time going concern opinions (GCOs). Our results, which support all three predictions, suggest that the public scrutiny associated with activism campaigns heightens auditors' concerns about reputational damage and litigation risk. Consistent with this notion, we find that activism targets are more likely to experience accounting‐related lawsuits. We also find that the increased likelihood of adverse ICOs documented in our baseline tests reflects higher‐quality reporting rather than increased auditor conservatism. Overall, our findings suggest that activism campaigns spur auditor diligence while also increasing the possibility of negative outcomes that may not be fully anticipated by activist investors.

We analyze the potential benefits that firms can realize from implementing technology specifically aimed at monitoring the effectiveness of their internal control systems. The Committee of Sponsoring Organizations of the Treadway Commission asserts that effective internal control monitoring should enhance the efficiency of internal control processes, and, in turn, the assurance over such processes (COSO 2009a). We develop hypotheses to test the realization of these potential benefits. Specifically, we identify a sample of firms that implemented internal control monitoring technology in response to the internal control requirements of the Sarbanes-Oxley Act. Consistent with our hypotheses, we document that the implementation of internal control monitoring technology is associated with lower likelihood of material weaknesses, smaller increases in audit fees, and smaller increases in audit delays during the post-SOX time period. We discuss the potential implications of our findings for research related to continuous monitoring, client-provided assurance assistance, and information technology governance.