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SYNOPSIS Regulations implemented by the SEC in 2003 and 2004 simultaneously shortened the financial statement filing deadlines and increased the time required for both the preparation of financial statements and the related audit of accelerated filers (AFs). However, there were indirect, unintended negative consequences for companies not subject to the regulations, namely, non-accelerated filers (NAFs). The new regulations imposed strains on auditor resources requiring auditors to make resource allocation decisions that negatively affected NAFs. We find that NAFs with an auditor who had a high proportion of AF clients (high-AF) had longer audit delays after the regulations were implemented than NAFs of an auditor with a low proportion of AF clients (low-AF). Further, we document that NAFs with high-AF auditors were more likely to change auditors than NAFs with low-AF auditors. Finally, NAFs that switched to auditors with less AFs experienced shorter audit delays after the auditor change. JEL Classifications: M42; M48.

This study responds to a recent call for research on the indirect effects of regulatory changes and examines the audit office effects of changes in client time pressure, using the first acceleration of the 10-K filing deadline as the primary research setting. The extant literature provides evidence that increased client time pressure adversely affects the timing and quality of individual engagements. We argue that because audit offices possess finite resources and production capacity, client-level pressure can have office-level effects. We document within-office differences related to changes in audit timeliness. In the same audit office, clients with no pressure (with pressure) experience an increase (a decrease) in audit report lag post-acceleration. This evidence suggests that auditors alter the timing of concurrent engagements in response to client pressure, and clients of the same office are affected differently by changes in time pressure. We also document across-office differences in audit/filing timeliness and audit quality. Clients of audit offices with more time pressure across the entire client portfolio have a greater increase in audit delay, are more likely to file late, and experience lower audit quality. Taken as a whole, our results are consistent with client pressure producing office effects as a result of the auditors’ response to increased resource constraints. These results should be informative to regulators and practitioners, because they suggest there are indirect costs associated with regulation and such effects are not limited to directly affected clients. Further, the results indicate that auditors do not always respond to changes in resource requirements in a manner that prevents undue strain.

While investors and regulators value the timely release of audited financial information, recent changes in the regulatory environment have increased the difficulty of providing timely audited financial information. In this paper we examine the association between auditor-client geographic proximity and external audit report delay, since identifying the factors that influence audit delay remains an important issue. We find strong evidence that audit reports are more timely for geographically proximate auditors and clients. Further, we show that the improvement in audit report timeliness is more pronounced for non-accelerated filers relative to accelerated filers. These results are robust to controls for potential self-selection bias.

SYNOPSIS We examine whether an auditor's involvement with a financial statement restatement has a negative effect on their reputation as evidenced by both clients' and the market's assessments of audit firm quality. Specifically, we investigate the effect of auditor involvement with restatements on the non-restating clients' likelihood to dismiss their auditors in the year subsequent to restatement and on non-restating clients' market adjusted returns (MARs) around the restatement announcement date. We also investigate whether the severity of the restatements has a differential effect on both variables. We find non-restating clients are more likely to dismiss auditors as the number of restatements the auditor was involved with increases, and this likelihood increases with the number of restated items. In addition, non-restating clients' MARs are significantly negative around the restatement announcement date and are more negative with more severe restatements.

This paper investigates whether investors’ bias in processing the information contained in the cash components of annual earnings has been reduced, and whether the difference in bias between financial analysts and investors has decreased subsequent to Regulation Fair Disclosure (hereafter, Reg FD). We compare analysts’ and investors’ weightings of the three cash flow components of earnings, defined by Dechow, Richardson, and Sloan (2008), from 1985 to 2008, using historical weightings as benchmarks. Our results show that, in the post Reg FD period, the magnitude of investors’ (analysts’) mis-weightings has decreased (increased), and the differences between analysts’ and investors’ mis-weightings have become smaller. Overall, these results suggest that financial analysts’ information advantages over investors declined after Reg FD took effect, and that investors consequently are less biased in assessing the persistence of the cash flow components of earnings following the implementation of Reg FD.

PurposeEffective August 23, 2004, the US Securities and Exchange Commission (SEC) requires all firms to disclose restatements via an item 4.02 Form 8‐K filing. However, a significant number of firms continue to disclose restatements using means other than an 8‐K. Commonly referred to as stealth restatements, the purpose of this paper is to investigate the materiality of restatements disclosed in either the 10‐K or the 10‐Q by comparing them to those disclosed via 8‐K.Design/methodology/approachUnivariate and multivariate analyses compare the characteristics of and the market reaction to 10‐K/10‐Q restatements to those of 8‐K restatements.FindingsThe authors find stealth restatements are more likely to be those not affecting net income, with longer filing delays, not subject to SEC investigation and made by firms audited by non‐big four accounting firms. The authors document a negative market reaction to 8‐K restatements around the restatement disclosure date. However, for stealth restatements they find no market reaction around the 10‐K/10‐Q filing date and for up to 22 trading days after the 10‐K/10‐Q filings. Research limitations/implications – The study shows a significant difference in materiality between stealth and 8‐K restatements.Practical implicationsThe study is important to investors, regulators and academics because it supports the notion that stealth restatements include less significant information relative to that disclosed in 8‐K restatements. This result is in line with the SEC disclosure requirement.Originality/valueThe significant number of stealth restatements since 2004 begs the question as to what kind of information is being disclosed in these restatements. The paper responds to this question.

Recent accounting and finance literature has introduced the term returns synchronicity, the relation of firm-specific returns to market-wide and industry-wide returns. This paper evaluates the power of fundamental synchronicity, proxied by financial accounting performance measures, to explain cross-sectional variation in returns synchronicity. In addition, we also test the potential effect of fundamental synchronicity on inferences about the relation of analyst coverage to returns synchronicity, as reported in Piotroski and Roulstone (2003). We find that various fundamental synchronicity measures are incrementally important to explain returns synchronicity. Furthermore, inferences about the relation of analyst coverage to returns synchronicity are sensitive to the inclusion of fundamental synchronicity measures as control variables.

This paper re-examines recent evidence of securities market mispricing that is associated with share-price scaled measures of financial analysts' earnings forecasts reported in Elgers, et al. (2001). The paper is motivated by inferences in Brown and Pfeiffer (2002) that a well known "share price anomaly," which entails substantial unconditional abnormal returns to share price, subsumes the evidence in Elgers, et al. (2001) of delayed securities returns associated with early-in-the-year price-scaled analysts' earnings forecasts. We find that the evidence of market mispricing reported in Elgers, et al. (2001) is robust to the incorporation of appropriate control for abnormal returns to share prices. Moreover, for firm-years with lower analyst coverage, both the analysts' forecasts and share prices have significant incremental relations to size-adjusted returns. These findings indicate that the share price anomaly does not underlie the market's under-weighting of financial analysts' forecasts. Rather, the share-price anomaly and the delayed returns to analysts' forecasts are distinct sources of abnormal returns, and are complementary rather than redundant inputs to a profitable hedge portfolio trading strategy, for firms with lower analyst coverage.