Apparent audit failures and value relevance of earnings and book value

Li Dang (Orfalea College of Business, California Polytechnic State University, San Luis Obispo, California, USA)
Kevin F. Brown (Department of Accountancy, Raj Soin College of Business, Wright State University, Dayton, Ohio, USA)
B.D. McCullough (Department of Decision Sciences, LeBow College of Business, Drexel University, Philadelphia, Pennsylvania, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Publication date: 17 May 2011



The purpose of this paper is to examine the value relevance of accounting information in cases of apparent audit failures.


The authors adopt the bootstrapping technique and compare the value relevance of key accounting information across samples of firms experiencing apparent audit failures with matched non‐audit failure firms.


Accounting information is found to be less value relevant for firms experiencing apparent audit failures, regardless of auditor reputation.

Research limitations/implications

This study has limitations due to the ex ante research approach adopted. Future research could address this issue by possibly incorporating an “intervening” factor into the model to indicate how the market can differentiate audit failure firms from other firms.


The paper gives support to the assertion that the market appears to rely less on accounting numbers when audit failures occur, even though formal allegations of audit failure may not appear until years after their occurrence. In addition to contributing to value‐relevance research by providing empirical evidence for the market phenomenon around the time of material misstatements, the paper demonstrates an innovative application of bootstrapping to test for differences in R2.



Dang, L., Brown, K. and McCullough, B. (2011), "Apparent audit failures and value relevance of earnings and book value", Review of Accounting and Finance, Vol. 10 No. 2, pp. 134-154.

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