Francis and Yu (2009) and Choi, Kim, Kim, and Zang (2010) report evidence that Big 4 audits are of higher quality when the engagement office is of larger size. Specifically, client earnings quality is higher and auditors in larger offices are more likely to issue going‐concern audit reports. We extend this line of research to test if larger Big 4 offices have fewer client restatements. A client restatement provides more direct evidence of a low‐quality audit than earnings quality metrics or going‐concern reports, because a restatement indicates the client's auditor did not effectively enforce the correct application of GAAP at the time the original financial statements were issued. We analyze 2,557 firm‐year restatements in a sample of 23,190 financial statements originally issued by U.S. firms from 2003 to 2008. We find that Big 4 office size is associated with fewer client restatements after controlling for innate client characteristics that may affect restatements (client size, financial performance, industry membership, nonfinancial measures, off‐balance sheet activities, and market‐related measures), and a set of controls for other auditor factors such as fees and industry expertise. The study raises important questions about the ability of smaller offices to deliver high‐quality audits for SEC registrants.

Audit regulators around the world have expressed concern over market dominance by Big 4 accounting firms and the potential adverse effect it may have on the quality of audited financial statements. We use cross‐country variation in the audit market structure of 42 countries to examine two separate aspects of Big 4 dominance: (1) Big 4 market concentration as a group relative to non–Big 4 auditors; and (2) concentration within the Big 4 group in which one or more of the Big 4 firms is dominant relative to the other Big 4 firms. We find that in countries where the Big 4 (as a group) conduct more listed company audits, both Big 4 and non–Big 4 clients have higher quality audited earnings compared to clients in countries with smaller Big 4 market shares. In contrast, in countries where there is a greater concentration within the Big 4 group, we find that Big 4 clients have lower quality audited earnings compared to countries with more evenly distributed market shares among the Big 4. Thus concentration within the Big 4 group appears to be detrimental to audit quality in a country and of legitimate concern to regulators and policymakers. However, Big 4 dominance per se does not appear to harm audit quality and is in fact associated with higher earnings quality, after controlling for other country characteristics that potentially affect earnings quality.

This study investigates the Kahn et al. (1964) measure of job‐related stressors, and the Everly et al. (1989) measure of stress (i.e., cognitive‐affective) arousal to ascertain whether the scales are measuring two distinct constructs. Data gathered from a sample of 1,618 members of the American Institute of Certified Public Accountants are analyzed to measure the psychometric properties of both instruments. Results from internal consistency, exploratory and confirmatory factor analyses, and item analyses indicate that both scales are reliable measures and the two scales are measuring different constructs, This study also examines the mediating effect of stress arousal on the relationship between sources of job stress, and resultant coping behaviors and psychological stress symptoms by means of structural modeling analyses. The results indicate that stress arousal is indeed a significant mediator in the stressor‐to‐illness process. Résumé. Les auteurs analysent l'instrument de mesure utilisé par Kahn et al. (1964) pour évaluer les facteurs de stress liés au travail ainsi que la mesure de la manifestation (cognitive‐affective) du stress proposée par Everly et al. (1989) pour confirmer si les échelles utilisées circonscrivent deux concepts distincts. Ils analysent les données colligées à partir d'un échantillon de 1 618 membres de l'American Institute of Certified Public Accountants afin d'évaluer les propriétés psychométriques des deux instruments de mesure. Les résultats tirés des analyses des facteurs de cohérence interne, des facteurs exploratoires et des facteurs de corroboration, ainsi que les analyses des éléments indiquent que les deux échelles de mesure sont fiables et qu'elles circonscrivent des concepts différents. Les auteurs examinent également l'effet de médiation de la manifestation du stress sur la relation entre les sources de stress au travail et les comportements d'adaptation qui en résultent et les symptômes de stress psychologique, au moyen d'analyses de modélisation des structures. Les résultats de l'étude indiquent que la manifestation du stress est, de fait, un médiateur d'importance dans le processus qui conduit du facteur de stress à la maladie.

We examine how GAAP‐based restrictions on managers' discretion over financial reporting influence financial statement users' efforts to acquire disclosure from management. During the question‐and‐answer part of a firm's conference call, we find that GAAP‐based restrictions are associated with more “account‐specific” questions by analysts (i.e., questions related to specific financial statement accounts). Managers appear to adjust current and future disclosure in response to analysts' questions, particularly when GAAP is restrictive: When an analyst asks a question about a particular account, managers are more likely to provide corresponding account‐specific information in their very next comment during the current call and in the presentation part of the next quarter's call. Furthermore, our tests suggest that when managers answer analysts' account‐specific questions, analysts' forecast quality is higher. Our study sheds light on the dynamic nature of the disclosure process between the constraints that managers face when preparing financial reports, users' efforts to acquire more financial statement information, and managers' provision of additional information. Overall, our findings suggest that users play an important role in triggering management disclosures and identifying the disclosures that are useful. Our analyses inform (1) standard setters, by showing that restrictions of reporting discretion shape not only mandatory reports but also the voluntary disclosure that emerges through manager–user interactions, and that restrictive GAAP may impose information acquisition costs on financial statement users; (2) managers, by showing that they can preempt the information deficiency created by restrictive GAAP through supplemental disclosure; and (3) analysts, by showing that they can achieve higher quality forecasts by actively soliciting information about accounts for which GAAP constrains what financial statements convey.

This study investigates how external corporate governance provisions, specifically statutory and corporate charter provisions that limit direct shareholder participation in the governance process, affect the likelihood of an accounting restatement. The analysis indicates that strong external governance (fewer restrictions on shareholder participation) is associated with a relatively low incidence of accounting restatements. The effect of external governance is incremental to that of internal governance, which is considered as provisions that foster effective board oversight of management. Such evidence supports the premise that shareholder participation improves financial reporting quality.

of Melbourne, and Universite´Paris Dauphine

We study whether the repricing of employee stock options is in the best interests of common shareholders by examining the excess stock returns associated with timely, noncontamin‐ated repricing announcements made by Canadian firms. On the basis of three theories of why firms reprice, we develop competing predictions about the mean announcement‐date excess stock return and the cross‐sectional relations among excess stock returns, the estimated probability of repricing, and proxies for predictions from each theory. For a sample of 72 noncontaminated repricing announcements made by Canadian firms between November 1994 and July 2001, we find a reliably positive three‐day announcement‐date mean excess return of 4.9 percent. The results of our cross‐sectional analyses suggest that the market responds favorably to repricings because they assist in retaining key employees even though, at the margin, they enable managers to extract rents from shareholders. We do not find sufficient statistically significant evidence to reliably conclude that repricings are done to realign employee incentives.

We create and validate measures capturing internal and external motivations to report honestly as trait‐like characteristics. Both measures have high levels of reliability, as well as convergent and divergent validity. To test their predictive validity, we conduct two experiments. In the first experiment, MTurk participants have the opportunity and incentive to misreport with no immediate consequences, and in the second experiment, participants with management experience report how they would make a hypothetical accounting allocation decision. In both experiments, we find that participants who are higher in internal motivations to report honestly are more likely to report honestly than those lower in internal motivations, confirming this measure's predictive validity. Both experiments also provide limited support for the predictive validity of our external measure, finding that those who are higher in external motivation do not report differently than those who are lower in external motivations in the absence of controls. Our study also reveals that individuals who are higher in internal motivations have a diminished reaction to different management controls: MTurk participants to a control that punishes misreporting, and manager participants to a control that rewards honest reporting. Results suggest that management and those charged with governance should consider that some employees can react negatively to controls that are perceived as constraining. Our measures are useful to researchers who investigate honest reporting by allowing them to identify, ex ante, individuals who want to be honest versus wanting to appear honest.

Based on interviews of U.S. public company compensation committee members, this study examines the compensation committee process, the specific action and thought processes that compensation committee members use to meet their oversight responsibilities. As the two quotes above suggest, compensation committee members who are asked to describe the process their committee uses often mention notions of “fairness” and “balance” in compensation. The first quote describes a fundamental tension between management and shareholders, and the committee’s efforts to be fair to both parties. The second quote focuses on balancing the interests of management and shareholders, as well as those of other stakeholders, and suggests the difficulty of making executive compensation decisions.

The digital evolution in auditing has triggered a rapid shift in auditors' required skill sets, with audit firms heavily investing in and extolling advanced data analytics and artificial intelligence (AI) capabilities. However, this strong emphasis on newly required digital skills can lead many experienced auditors, who perceive these competencies as their weaker areas, to feel disaffirmed in their abilities. We predict and find, across two experiments, that auditors who feel disaffirmed in their digital skills more defensively discount specialist advice that places higher versus lower reliance on AI, but that an intervention in which auditors affirm their traditional audit skills mitigates this defensive reaction. Absent self‐affirmation, higher specialist reliance on AI results in auditors denigrating the competence and quality of advice that specialists provide. These findings suggest that disaffirmation escalates AI aversion, offering important insights into how audit firms can foster less defensive decision‐making in the rapidly evolving audit environment.