Pro Forma Disclosures, Audit Fees, and Auditor Resignations
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Type of Work21 pages
Citation of Original PublicationChen, L., Krishnan, G., & Pevzner, M. (2012). Pro-Forma Disclosures, Audit Fees, and Auditor Resignations, Journal of Accounting and Public Policy, 31(3), 237-257 (lead article).
The disclosure of non-GAAP (pro forma) earnings numbers by managers in the post-SOX era continues to attract attention from regulators, media, and researchers. However, there is limited empirical evidence on how auditors view clients that emphasize pro forma earnings over GAAP earnings. We study the extent to which audit fees and auditor resignations are associated with opportunistic non-GAAP disclosures. We find that during the pre-SOX period, optimistic pro forma differences, measured using either IBES actual earnings or hand-collected pro forma earnings, are associated with higher audit fees and a higher likelihood of auditor resignations. Additional results indicate that auditors seem to be more concerned with non-GAAP earnings disclosures in the post-SOX period.