Audit quality and attributes of management earnings forecasts

Abstract

Purpose

The purpose of this study is to examine the impact of auditor type on management’s choice of forecast precision and management forecast errors, including the effects of corporate governance. The authors use a different sample and a larger period of years to determine whether prior inferences are robust across these dimensions as well as various corporate governance and other control variables.

Design/methodology/approach

This quasi-experimental study uses archival data in regression-based analyses.

Findings

The authors find firms with Big 5 auditors issue forecasts that have larger forecast errors are biased downward and are less precise. The inferences of this study are robust to the inclusion of corporate governance variables, along with an extensive number of control variables found important in prior studies.

Research limitations/implications

While the sample and time period may be limited, the authors have no evidence this biases the results.

Practical implications

More stringent auditing may have an unintended consequence of reducing the informativeness of management forecasts, as managers act strategically in regards to forecast accuracy, bias and precision.

Social implications

The inferences of this study indicate that while higher quality audits could constrain earnings management, higher quality audits may induce management to provide forecasts that have greater errors, may be biased and may be less informative.

Originality/value

The results and inferences of this study suggest that the inferences in prior studies hold across a different sample and a different time period. This is important given concerns in the academic community regarding the extent to which prior studies can be replicated.

Citation

Chi, Y.-H. and Ziebart, D.A. (2017), "Audit quality and attributes of management earnings forecasts", Review of Accounting and Finance, Vol. 16 No. 4, pp. 406-423. https://doi.org/10.1108/RAF-01-2015-0003