Topic:Big 4 Auditors, Litigation Risk, and Disclosure Tone
Speaker:Ivy Zhang, Carlson School of Management, University of Minnesota
Time:Friday, June 16th,10:00-11:30 a.m
Place:Room 217, Guanghua Building 2
We examine the impact of Big 4 auditors on management’s use of optimistic language in audited financial reports. While regulators and practitioners consider the audit of disclosures to be increasingly important, empirical evidence of an auditor’s impact on management’s disclosure choices, especially the qualitative aspects of disclosure, is scarce. Focusing on the notes to the financial statements, the primary disclosure item subject to audit, we find that the tone of the notes is significantly more reflective of bad economic news in the presence of a Big 4 auditor. This Big 4 impact on footnote tone is more pronounced in the subsample of companies facing high litigation risks. Our inferences continue to hold for matched samples constructed using coarsened exact matching and entropy balancing to control for inherent differences between clients of Big 4 and non-Big 4 auditors. These results are consistent with higher litigation exposure motivating Big 4 auditors to constrain management’s use of optimistic language. We also examine Management’s Discussion and Analysis, which is not subject to audit, and do not find a Big 4 impact on the sensitivity of its tone to bad news. This research extends the auditing and disclosure literatures by documenting an effect of Big 4 auditors on qualitative disclosures and informs the ongoing regulatory discussions regarding the audit of disclosures.
Ivy Xiying Zhang received her Ph.D. in Business Administration and M.S. in Applied Economics from the University of Rochester. Her research interests lie in the broad area of financial accounting. Her work has been published in Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, and Review of Accounting Studies. She has been an ad hoc reviewer for several leading accounting journals, including Journal of Accounting and Economics, The Accounting Review, Review of Accounting Studies, and Contemporary Accounting Research.
Your participation is warmly welcomed!