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Purpose This study aims to explore the relation among US audit partners’ characteristics, their career advancement and audit quality. Design/methodology/approach This study uses data from Public Company Accounting Oversight Board Form AP, Auditor Reporting of Certain Audit Participants, and publicly available online data sources. The hand-collected data on audit partners’ personal characteristics include gender, work experience and educational background. The measures for audit quality include restatements and audit fees. Findings The authors find that audit partner characteristics matter for the time it takes an individual to reach partnership after completing a bachelor’s degree. There are significant differences in work experience and educational background between partners in the largest (Big N) audit firms and smaller (non-Big N) audit firms. Audit partner traits are related to audit quality, and the effects differ between Big N and non-Big N partners. Originality/value The literature has examined audit partners’ career paths using international data. However, little empirical academic research has examined the career advancement of US audit partners. This study provides initial insights on the career advancement of US partners on a large scale and complements the recent research that examines audit partner characteristics and audit quality in the US market.

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.

This study constructs composite forecasts and evaluates their contextual usefulness as a proxy for investors’ expectations of annual earnings. Our empirical tests utilize composites of three forecast sources: financial analysts’, time-series and security-price based forecasts. Our full sample results support the incremental usefulness of composite forecasts, over and above that of any of the three forecast sources. Moreover, results from partitioned subsamples show that the usefulness of composite forecasts is contextual. Composite forecasts are a better proxy for investors’ earnings expectations when (1) the information environment is relatively poor; or (2) firms experience negative performance in the prior year.

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.

PurposeThe purpose of this study is to examine whether financial analysts mislead investors in recognizing the differential persistence of the three cash flow components of earnings, defined by Dechow et al., in forecasting annual earnings.Design/methodology/approachThe paper uses Mishkin's econometric approach to compare the persistence of the cash flow components within and across the historical, analysts' and investors' weightings.FindingsIt is found that financial analysts' weightings of the cash flow components are more closely aligned with the historical relations than are investors' weightings, both in direction and in magnitude. The degree of analysts' mis‐weighting is economically small and much lower than the degree of investors' mis‐weighting. Moreover, the extent of both investors' and analysts' mis‐weightings of the cash components is generally smaller for firms with greater levels of analyst following, a proxy for the quality of the information environment.Research limitations/implicationsThe findings suggest that financial analysts' bias in weighting the cash components of earnings is at best a partial explanation for investors' bias.Practical implicationsThis study is important to academics and the investment community that relies upon financial analysts as information intermediaries, because the ability of analysts to incorporate value‐relevant information in their published expectations may impact securities prices.Originality/valueThe study is the first to document the weightings of the cash components of earnings by financial analysts. In addition, this paper provides evidence that financial analysts, as information intermediaries, are less biased than investors in processing not only the accrual but also the cash components of earnings.

This paper re-evaluates evidence in Ayers and Freeman [Ayers, F., Freeman, R., 1997. Market assessment of industry and firm earnings information. Journal of Accounting and Economics 24, 205–218] suggesting that investors anticipate industry-wide components of earnings earlier than firm-specific components, and that post-earnings-announcement drift following annual earnings announcements is due primarily to firm-specific components of earnings. Our tests indicate that post-announcement drift is entirely attributable to coefficient bias due to measurement errors in the use of realized earnings changes as proxies for unexpected earnings. Also, coefficient differences in the market's anticipation of subsequent-year industry and firm-specific earnings become insignificant when we introduce suitable controls for non-linearity in the return/earnings relation.

PurposeFrankel and Lee (1998) report significant abnormal security returns to a trading strategy based on the ratio of the intrinsic value to the market value of common equity (V/P). However, they measure the intrinsic value estimates based on the residual income model using several fundamental variables that have been documented to be associated with subsequent abnormal stock returns. The purpose of this paper is to test whether combining all these individual anomalies to V/P has generated additional predictive power, and whether the abnormal returns related to V/P are due to thepredictive ability of the residual income model or to that of the components used in constructing V/P.Design/methodology/approachTwo methods are used in this study to examine V/P's incremental effect. First, all the component variables of V/P are included in the same regression with V/P to test whether the coefficient of V/P remains significant. Second, an alternative ex ante transformation of the same component variables is developed and a test is conducted to see whether the trading profits based on V/P and the ex ante transformation differ.FindingsOverall, the paper finds that V/P does not provide additional explanatory power for subsequent abnormal returns over its component variables, especially analyst forecasts of earnings. The results imply that the source of the delayed security returns related to V/P is the biases in investors' expectations regarding the constituent anomaly variables.Originality/valueThis paper shows that V/P is not a distinct market anomaly. This finding is important to various stock market participants.

This study addresses the impact of firm- and time-specific attributes on the accuracy of composite forecasts of annual earnings, constructed from time-series, price-based, and analysts' forecasts. The attributes examined include firm size, analysts' coverage, and time periods pre-dating and following the implementation of regulation fair disclosure. Our results indicate that the relative accuracy of the composite forecasts is time-specific. In the pre-regulation fair disclosure period, composite forecasts significantly outperform each of the three individual forecast sources. Moreover, the extent of improvement in accuracy of composite forecasts is significantly higher for the smaller and lightly-covered firms. Collectively, these results suggest that the predictive accuracy of composite forecasts is contextual.

This paper develops a novel approach to evaluate the likelihood that omitted risk factors or market mispricing underlies the anomalous security returns to analyst earnings forecast-based attributes, reported in Frankel and Lee (1998) and Elgers, Lo and Pfeiffer (2001). My approach is to incorporate predictable errors in analyst earnings forecasts and use the adjusted forecasts to evaluate the underlying phenomenon. The results show that the adjustments of analyst forecasts improve both the predictive accuracy of the forecasts and the ability of the forecasts to represent investor earnings expectations. These adjusted forecasts, however, do not enable improvements in the abnormal security returns resulting from the trading strategies in the two studies. The inability to show improvements is consistent with the interpretation that the predictable security returns documented are more likely due to omitted risk factors rather than to security mis-pricing.

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.