Knowledge that Transforms

Accounting big baths are pervasive in practice. While big baths can improve the information environment and reduce information asymmetry, they can also degrade the information environment and obscure operating performance. In this study, we examine the role of management ethics. Specifically, we investigate whether managers’ truthfulness (or conversely, deceptiveness) affects how investors perceive big baths. Using linguistic analysis on earnings-conference calls to measure managerial deception and employing a difference-in-differences research design with propensity-score matching, we find that information asymmetry is significantly higher following big baths taken by deceptive CEOs, compared with big baths taken by less deceptive CEOs.

Given the increasing financial impact of cybercrime, it has become critical for companies to manage information security risk. The practitioner literature has long argued that the internal audit function (IAF) can play an important role both in providing assurance with respect to information security and in generating insights about how to improve the organization's information security. Nevertheless, there is scant empirical evidence to support this belief. Using a unique data set, this study examines how the quality of the relationship between the internal audit and the information security functions affects objective measures of the overall effectiveness of an organization's information security efforts. The quality of this relationship has a positive effect on the number of reported internal control weaknesses and incidents of noncompliance, as well as on the numbers of security incidents detected, both before and after they caused material harm to the organization. In addition, we find that higher levels of management support for information security and having the chief information security officer (CISO) report independently of the IT function have a positive effect on the quality of the relationship between the internal audit and information security functions.

A questioning nature and professional skepticism are fundamental requirements for auditors to conduct high quality audits and facilitate appropriate financial reporting. This study considers whether computer-mediated communication (CMC) reduces auditors' questioning during interactions with the client, compared to face-to-face (FTF) communication. We also examine how nonverbal cues commonly associated with deception affect auditors' skeptical behavior. Based on partner interviews and a survey comparing partners/managers with staff, we find that partners are concerned with the increased use of CMC for a variety of reasons, and that staff are more comfortable using CMC in a wider array of audit settings than are managers and partners. Experimental results based on Social Presence Theory (SPT) demonstrate that FTF interactions include more content and follow-up questions (a key aspect of skepticism) than CMC. Additionally, auditors engage in fewer relationship-building statements when communicating electronically. Also consistent with SPT, auditors communicating electronically request more documentation, though they ask fewer questions in general. Finally, using a unique measure of auditor skepticism based on revealed behavior, we find that auditors were more skeptical if the controller displayed nonverbal cues associated with deception, than when these specific cues were not present or not observable (CMC). Our findings suggest that communication mediums with reduced channels (e.g., no audio or visual channels), such as CMC, are less appropriate for complex and unique problem solving tasks. When paired with the concern that younger staff auditors are more likely to engage in CMC, skeptical behavior could be stunted in the modern audit environment, impacting financial statement quality.

I provide a general framework of firms’ financial communication process and investor response to information, moving from disclosure through dissemination to investor response and management response. I then discuss the entrance of social media into firm communications, highlighting both classic and unique aspects of social media in the communication process. I place Cade (2018) in this literature and discuss areas ripe for future research. Finally, I encourage researchers interested in social media to acknowledge and embrace the unique opportunities and challenges in this area.