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Users’ Judgments of Managers and Auditors: The Impact of Accounting Treatment and Reconciliation
Susan D. Krische, University of Illinois at Urbana - Champaign
Paula R. Sanders, University of Illinois at Urbana - Champaign
Steven D. Smith, University of Illinois at Urbana - Champaign
ABSTRACT. We examine how supplemental accounting disclosures affect users’ judgments about management credibility and expectations of the auditor. In a lease obligation setting, our experiment separates the effects of understanding the financial impact of alternative accounting treatments (by manipulating the presence of a reconciliation of disclosed lease obligations to capitalization) from inferences made based on management’s choice of accounting disclosures (by manipulating the reconciliation source). Users who receive a reconciliation report lower management credibility, higher investment risk, and higher audit expectations when the reconciliation is provided by a source other than management. Results demonstrate the effects of the presence and source of reconciliation on investment risk and management credibility judgments, extending research on the influence of managerial reporting discretion to audit expectations, with implications for the expectation gap and auditor business risk.
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