Seminario académico de Finanzas y Contabilidad

Fecha: 07 de enero, 13:00 horas, sala P 302, Facultad de Economía y Negocios

Título: How Changing Economic Conditions Over Multiple Periods Affect Earnings Overstatements, Audit Risk, and Market Prices

Expositor: Reed Smith, profesor de Contabilidad en Indiana University

We analyze a setting in which the auditor designs an audit to detect a possible overstatement in reported earnings over multiple periods. The multi-period analysis allows us to examine how changing economic conditions affect the auditor’s assessment of fraud, the manager’s inclination to overstate earnings, the firm’s market price and audit risk. Good economic conditions may promote earnings overstatement due to the market’s expectations for good earnings reports and may provide “cover” for a dishonest manager to execute a fraudulent reporting strategy. Alternatively, bad economic conditions may encourage earnings overstatement. The empirical implications of our study include: how bias is reflected in market prices through an intercept effect; the limitations of a contemporaneous research design on assessing the implications of an exogenous shock to existing economic conditions; and, how the changing expectations of future earnings affect the related implications of this choice on earnings overstatements, market price, and audit risk.