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Essays on auditor quality and non-GAAP earnings
Dissertation   Open access

Essays on auditor quality and non-GAAP earnings

Xiaojie Christine Sun
Doctor of Philosophy (Ph.D.), Drexel University
01 Jun 2015
DOI:
https://doi.org/10.17918/etd-6391
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Abstract

Quality control--Auditing Accounting--Standards Accounting
Chapter 1 provides empirical evidence that auditors may play a role in the disclosure of non-GAAP earnings. Using non-GAAP earnings disclosures hand-collected from firms' annual press releases, I find that firms are more likely to disclose non-GAAP earnings if their auditors are industry experts. Furthermore, firms with these high quality auditors report low quality non-GAAP exclusions in their reconciliation to GAAP income/loss. I interpret these results as suggesting that managers are more likely to opportunistically disclose non-GAAP earnings when they have high quality auditors. However, I do not find a significant association between auditor quality and the likelihood of non-GAAP earnings meeting or beating financial benchmarks. Taken together, my results suggest a negative relationship between auditor quality and non-GAAP earnings quality, in contrast to the positive effects of auditor quality on GAAP earnings documented in prior literature. These findings contribute to the literature on audit quality and non-GAAP earnings, as well as to the regulatory discussion of whether non-GAAP earnings should be audited. Chapter 2 investigates the characteristics of actual, disclosed non-GAAP exclusions. My results indicate that three categories of exclusions that increase non-GAAP earnings, impairment expenses, loss, mark-down, and mark-offs, and other exclusions that increase non-GAAP earnings, are associated with the next period's operating income, indicating that these exclusions are of low quality or may be opportunistic. However, stock-based compensation, amortization expenses, and restructuring costs excluded from non-GAAP earnings do not predict future operating income and therefore are one-time high-quality exclusions. I find no consistent results on the persistence of exclusions that decrease non-GAAP earnings (i.e. gains). These results contribute to the literature by providing the first empirical evidence on the quality of actual non-GAAP exclusions disclosed by companies. Next, I extend the analyses in Chapter 1, finding that high-quality auditors are negatively related to the quality of non-GAAP increasing exclusions. However, I do not find evidence that firms with high-quality auditors are more likely to use non-GAAP increasing exclusions to meet or beat financial benchmarks, further supporting the results presented in Chapter 1.

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