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Compliance with Auditor Change Disclosure Requirements: Theory and Empirical Tests
Michael Ettredge, University of Kansas
Karla Johnstone, University of Wisconsin - Madison
Mary Stone, University of Alabama
Qian Wang, University Of Kansas
ABSTRACT. We address an important, previously ignored question: Why do managers comply or fail to comply with disclosure requirements? We develop a conceptual model that recognizes three disclosure outcomes: compliance, intentional noncompliance, and accidental noncompliance. Our model relates these disclosure outcomes to (1) a company’s disclosure compliance infrastructure, which includes monitoring and corporate governance mechanisms that are determined by the company’s long-term disclosure incentives and resources to develop the infrastructure, and (2) disclosure disincentives that arise when disclosure of bad news is required. Tests of the conceptual model using data gathered from recently released SEC staff letters identifying omissions in mandatory auditor change disclosures support the importance of compliance infrastructure and disincentives to disclose bad news. Some evidence also supports the roles of incentives and resources in development of investment in compliance infrastructure
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