A new look at auditors' reactions toward substance versus form in financial reporting

Abstract

A decade ago, we conducted a study (reported inMartens McEnroe, 1992) with the result that auditors neglected substance over form and perceived little exposure to litigation in doing so. The theoretical basis of the previous paper was implicit contract theory. We have had occasion to change our analysis since the previous work; in this paper we focus on the commodification of audits, and trace the neglect of substance over form to that commodification. We present evidence that recent actions by the SEC have altered the perception of auditors that the letter of GAAP (Generally Accepted Accounting Principles) is an aegis against litigation, and that audits which do not opine on substance over form are perfectly marketable commodities. We find, however, that audits which do not opine on substance vs. form are extant, and we cannot conclude that a change in the conditions of production of the audit commodity has occurred or is imminent.

Citation

Martens, S.C. and McEnroe, J.E. (2002), "A new look at auditors' reactions toward substance versus form in financial reporting", Lehman, C.R. (Ed.) Mirrors and Prisms Interrogating Accounting (Advances in Public Interest Accounting, Vol. 9), Emerald Group Publishing Limited, Leeds, pp. 149-164. https://doi.org/10.1016/S1041-7060(02)09010-7