Individual Investors’ Perceptions Involving the Quality and Usefulness of Audited Financial Statements

Abstract

The integrity of audited financial statements has been widely criticized, especially over the last decade. Arthur Levitt, then chairman of the Securities Exchange Commission (SEC), brought widespread attention to the practice of earnings management in a speech he delivered in 1998 (Levitt, 1998). His successors in the SEC have also focused on the issue. The business media has also devoted much coverage to the topic and criticized the creative accounting practices of many well-known companies. These factors, in conjunction with the collapse of Enron and WorldCom, have probably engendered a loss of confidence in the credibility and transparency of audited financial statements. Two months after the Enron accounting irregularities became public, a Wall Street Journal article attributed a 250-point decline in the Dow Jones Industrial Average to concerns over widespread accounting misconduct (Browning & Weil, 2002). These same concerns were cited as a significant factor for the downward trends in the equity markets almost a year later (Browning & Dugan, 2002). The business media has offered numerous opinions such as these as to how investor confidence in audited financial statements has declined. However, a review of the literature found no corresponding empirical study conducted subsequent to the Enron and WorldCom revelations. Accordingly, this study examines the extent to which individual investors’ perceive that their attitudes involving the quality and usefulness of the information in audited financial statements have changed as a result of these events. The results indicate that investors perceive that a notable decrease of confidence in various dimensions of the quality and usefulness of this information has occurred. The findings indicate that accounting regulators and other parties should undertake actions to help restore investor confidence.

Citation

McEnroe, J.E. (2007), "Individual Investors’ Perceptions Involving the Quality and Usefulness of Audited Financial Statements", Lehman, C.R. (Ed.) Envisioning a New Accountability (Advances in Public Interest Accounting, Vol. 13), Emerald Group Publishing Limited, Leeds, pp. 63-79. https://doi.org/10.1016/S1041-7060(07)13004-2