Yim, Andrew (2011): Are positive reactions to bad news plausible? the consideration of fraud detection in audit and reporting delays.
This is the latest version of this item.
Download (555Kb) | Preview
I formulate a model to emphasize the fraud detection role of auditors in the financial market and relate the role to audit and financial reporting delays. The model focuses on asset misappropriation fraud, which is one of the two types of fraud US and international auditing standards require auditors to consider. In the model, an auditor considers whether to perform extended audit procedures after observing a red flag generated from regular audit procedures. An audit delay is represented by the event of extending audit procedures and manifested as a financial reporting delay observed by the market. I derive a simple closed-form condition characterizing when a positive market reaction to a delay is possible. The condition provides a theoretical basis for formulating empirically testable hypotheses. I discuss why the fundamental logic behind the counter-intuitive positive-reaction condition also applies to accounting fraud, as well as other contexts (e.g., internal control weakness disclosure). Documented evidence in the literature suggests that “positive reactions to bad news” (PR2BN) is a general phenomenon. Other empirical implications of the model, with suggestions for regression equation specifications, are also discussed.
|Item Type:||MPRA Paper|
|Original Title:||Are positive reactions to bad news plausible? the consideration of fraud detection in audit and reporting delays|
|Keywords:||Audit delay, financial reporting lag, extended audit, red flag, fraud detection, SAS 82, SAS 99|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M42 - Auditing
K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Andrew Yim|
|Date Deposited:||11. Sep 2011 01:51|
|Last Modified:||12. Feb 2013 05:29|
Alford, A. W., J. J. Jones, and M. E. Zmijewski (1994): Extensions and violations of the statutory SEC form 10-K ling requirements, Journal of Accounting and Economics, 17(1-2), 229254.
Ashton, R. H., J. J. Willingham, and R. K. Elliott (1987): An Empirical Analysis of Audit Delay, Journal of Accounting Research, 25(2), 275292.
Bagnoli, M., W. Kross, and S. G. Watts (2002): The Information in Management's Expected Earnings Report Date: A Day Late, a Penny Short, Journal of Accounting Research, 40(5), 12751296.
Bamber, E. M., L. S. Bamber, and M. P. Schoderbek (1993): Audit structure and other determinants of audit report lag: An empirical analysis, Auditing: A Journal of Practice & Theory, 12(1), 123.
Begley, J., and P. E. Fischer (1998): Is there Information in an Earnings Announce- ment Delay?, Review of Accounting Studies, 3(4), 347363.
Camerer, C., and R. H. Thaler (1995): Anomalies: Ultimatums, Dictators and Man- ners, The Journal of Economic Perspectives, 9(2), 209219.
Chambers, A. E., and S. H. Penman (1984): Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements, Journal of Accounting Research, 22(1), 21 47.
Decision News Media SAS (2003): Ahold delays audit results as fraud deepens, May 26, http://www.foodanddrinkeurope.com/content/view/print/81368.
Dwyer, P. D., and E. R. Wilson (1989): An empirical investigation of factors aecting the timeliness of reporting by municipalities, Journal of Accounting and Public Policy, 8(1), 2955.
Erard, B., and J. S. Feinstein (1994): Honesty and Evasion in the Tax Compliance Game, The RAND Journal of Economics, 25(1), 119.
Ettredge, M. L., C. Li, and L. Sun (2006): The impact of SOX Section 404 internal control quality assessment on audit delay in the SOX Era, Auditing: A Journal of Practice and Theory, 25(November), 123.
Evans, J. H., R. L. Hannan, R. Krishnan, and D. V. Moser (2001): Honesty in Managerial Reporting, The Accounting Review, 76(4), 537559.
Fischbacher, U., and U. Stefani (2007): Strategic Errors and Audit Quality: An Experimental Investigation, The Accounting Review, 82(3), 679.
Gennotte, G., and B. Trueman (1996): The Strategic Timing of Corporate Disclo- sures, The Review of Financial Studies, 9(2), 665690.
Givoly, D., and D. Palmon (1982): Timeliness of Annual Earnings Announcements: Some Empirical Evidence, The Accounting Review, 57(3), 486508.
Hogan, C. E., Z. Rezaee, J. Riley, and U. K. Velury (2008): Financial Statement Fraud: Insights from the Academic Literature, Auditing: A Journal of Practice & Theory, 27(2), 231252.
Johnson, L. E., S. P. Davies, and R. J. Freeman (2002): The eect of seasonal variations in auditor workload on local government audit fees and audit delay, Journal of Accounting and Public Policy, 21(4-5), 395422.
Kartik, N. (2008): Strategic Communication with Lying Costs, Review of Economic Studies, forthcoming, December 12, 2008.
Knechel, W. R., and J. L. Payne (2001): Additional Evidence on Audit Report Lag, Auditing: A Journal of Practice & Theory, 20(1), 137146.
Kreps, D. M., P. Milgrom, J. Roberts, and R. Wilson (1982): Rational cooperation in the nitely repeated prisoners' dilemma, Journal of Economic Theory, 27(2), 245252. Krishnan, J., and J. S. Yang (2009): Recent Trends in Audit Report and Earnings Announcement Lags, SSRN eLibrary.
Lambert, T. A., J. F. Brazel, and K. L. Jones (2008): Unintended Consequences of Accelerated Filings: Do Changes in Audit Delay Lead to Changes in Earnings Quality?, SSRN eLibrary, November.
Loomes, G. (2005): Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data, Experimental Economics, 8(4), 301.
Matsumura, E. M., and R. R. Tucker (1992): Fraud Detection: A Theoretical Foun- dation, The Accounting Review, 67(4), 753782.
McLelland, A. J., and G. Giroux (2000): An empirical analysis of auditor report timing by large municipalities, Journal of Accounting and Public Policy, 19(3), 263281.
Morgenson, G. (2009): S.E.C. Accuses Countrywide's Ex-Chief of Fraud, The New York Times.
Newman, D. P., E. R. Patterson, and J. R. Smith (2005): The Role of Auditing in Investor Protection, Accounting Review, 80, 289313.
Owusu-Ansah, S., and S. Leventis (2006): Timeliness of corporate annual nancial reporting in Greece, European Accounting Review, 15(2), 273287.
Patterson, E. R., and J. R. Smith (2007): The Eects of Sarbanes-Oxley on Auditing and Internal Control Strength, The Accounting Review, 82(2), 427455.
Rieskamp, J. (2008): The probabilistic nature of preferential choice, Journal of Experi- mental Psychology: Learning, Memory, and Cognition, pp. 14461465.
Sengupta, P. (2004): Disclosure timing: Determinants of quarterly earnings release dates, Journal of Accounting and Public Policy, 23(6), 457482.
Shleifer, A., and D. Wolfenzon (2002): Investor protection and equity markets, Journal of Financial Economics, 16, 328.
Smith, J. R., S. L. Tiras, and S. S. Vichitlekarn (2000): The interaction between internal control assessment and substantive testing in audits for fraud, Contemporary Accounting Research, 17(2), 327.
Wall Street Journal (1995): Sensormatic's Stock Skids 17% on News of Expanded Audit, September 1.
Wilcox, N. T. (2009): 'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk, Journal of Econometrics, forthcoming.
Available Versions of this Item
Fraud Detection and Financial Reporting and Audit Delay. (deposited 06. Jan 2011 10:29)
- Are positive reactions to bad news plausible? the consideration of fraud detection in audit and reporting delays. (deposited 11. Sep 2011 01:51) [Currently Displayed]