6. Auditing - key concepts

Accurate financial reporting is only important for equity and debt investors

Transparency refers to the degree to which the company provides details that supplement and explain accounts reported in statements and filings

Internal controls ensure that financial reports precisely reflect changes in financial position, earnings, and cash flow

The minimum requirement for accounting quality is that financial reports are useful in decision-making

Managers are much more likely to report a small decrease in earnings than a small increase (earnings management)

Listed firms are generally effective in preventing abuse by management in their financial reports

IFRS implementation reduces the scope for earnings management

Negligent financial reporting involves unintentional errors due to factors such as inadequate experience, training, knowledge, or supervision

Fraudulent financial reporting refers to the practices such as knowingly failing to comply with GAAP

Managers commit financial reporting fraud to avoid a decline in the value of their stocks, stock appreciation rights, and options

Financial frauds appear to share three properties: inability to meet performance expectations, personal costs of failing to meet expectations, and being able to convince oneself that real performance will improve soon

The term earnings management is used to describe managers intervening in the reporting of their own financial performance, including practices that violate accepted standards of disclosure

Unintentional errors in financial reporting decisions are not possible

Real earnings management in a financially distressed firm leads to corporate bankruptcy, or at least speeds up the failing process

Clarivate PLC concluded that recent financial statements should no longer be relied upon due to an error found in those statements

According to the provided text, accounting frauds are very common among listed firms

During extended economic booms, lax governance practices often develop, leading to a risk of becoming complacent.

Lehman Brothers predominantly funded itself through long-term financing.

The demise of Bearn Stearns in March 2008 had no impact on Lehman Brothers.

Lehman Brothers presented a misleading picture of its financial condition after the demise of Bearn Stearns.

Lehman announced a $3.9 billion profit for Q3 of 2008.

The US government had the legal authority to make a direct capital investment in Lehman.

The demise of Lehman Brothers triggered a crisis of confidence in the financial system, ultimately leading to the global financial crisis.

The audit committee within the board is responsible for handling and preparing all accounting-related matters for full board meetings.

External auditors express an opinion on whether financial statements comply with accounting standards.

Internal auditors report to the audit committee and oversee the firm’s financial and operating procedures.

Industry consolidation has not impacted factors such as scale, expertise, competition, and fees.

Research evidence suggests that mandatory audit rotation leads to lower audit quality.

Auditors' crime convictions are used as a proxy for their propensity to take risks in personal matters, which reflects their willingness to take audit risks.

Male auditors with criminal convictions are more likely to be employed in non-Big-N audit firms, which are less tolerant of risk-taking auditors.

Firms with major shareholders convicted of crimes are less likely to appoint auditors with criminal convictions.

Auditors with criminal convictions engage in low-risk audits and charge lower audit fees after controlling for other audit-risk variables.

The study provides detailed statistics on the types of crime convictions among auditors and their penalty ranges.

The research findings indicate that auditors with criminal convictions tend to be younger, have fewer clients, and earn lower income.

The study also reveals that firms appointing auditors with criminal convictions tend to have higher leverage and smaller size.

The bibliography includes works by various researchers on topics such as IQ and audit quality, audit partner rotation, and real earnings management in bankrupt firms.

The study challenges the assumption that auditors are homogenous individuals with similar personal characteristics.

Auditors with criminal convictions tend to be older, have fewer clients, and earn lower income.

Firms with major shareholders convicted of crimes are more likely to appoint auditors with criminal convictions.

Auditors' Risk-Taking Research Findings

Accurate financial reporting is only important for equity and debt investors.

Transparency refers to the degree to which the company provides details that supplement and explain accounts reported in statements and filings.

IFRS implementation reduces the scope for earnings management.

Internal controls ensure that financial reports precisely reflect changes in financial position, earnings, and cash flow.

Managers who commit to financial reporting fraud only have financial incentives for doing so.

Negligent financial reporting involves unintentional errors due to factors such as inadequate experience, training, knowledge, or supervision.

The term earnings management refers to practices that are legal and generally viewed as ethical.

Firms are supposed to manage their earnings in order to mislead stakeholders.

The implementation of IFRS reduces the scope for earnings management.

Earnings management in financially distressed firms does not lead to corporate bankruptcy.

Clarivate PLC concluded that recent financial statements should no longer be relied upon due to an error found in those statements.

Fraudulent financial reporting refers to practices such as knowingly failing to comply with GAAP.

Managers who commit to financial reporting fraud have no non-financial motives for doing so.

Financial frauds appear to share three properties: inability to meet performance expectations, personal costs of failing to meet expectations, and being able to convince oneself that real performance will improve soon.

Unintentional errors are not possible in financial reporting decisions.

Unintentional errors in financial reporting decisions are not possible.

Lehman Brothers predominantly funded itself through long-term financing.

The demise of Lehman Brothers triggered a crisis of confidence in the financial system, ultimately leading to the global financial crisis.

The audit committee within the board is responsible for ensuring reliable financial reporting, handling and preparing all accounting-related matters for full board meetings.

External auditors assess the validity and reliability of financial reporting, with the objective to express an opinion on whether statements comply with accounting standards.

Industry consolidation has led to the dominance of the 'Big Four' accounting firms, impacting factors such as scale, expertise, competition, and fees.

Auditor rotation and auditors’ personal characteristics have been shown to impact audit quality, with research evidence suggesting that mandatory audit rotation leads to greater audit quality and that auditors’ personal characteristics do matter at work.

In an extended economic boom, performance expectations such as earnings, revenue forecasts, share prices, and investment decisions become built into the market.

Lax governance practices often develop during a long boom, as corporate monitors come to accept high growth as normal, leading to a risk of becoming complacent.

Lehman Brothers, the 4th biggest investment bank in the US, predominantly had long-term assets and short-term liabilities, funding itself through short-term financing.

After the demise of Bearn Stearns in March 2008, Lehman was considered as the next possible bank to fail, which led to the company presenting a misleading picture of its financial condition.

The US government reported it did not have the legal authority to make a direct capital investment in Lehman, leading to its bankruptcy filing on September 15, 2008.

Internal auditors report to the audit committee, oversee the firm’s financial and operating procedures, check the accuracy of the financial record-keeping, and ensure compliance with accounting regulations.

Male auditors with criminal convictions are more likely to be employed in non-Big-N audit firms, which are less tolerant of risk-taking auditors.

Firms with major shareholders convicted of crimes are more likely to appoint auditors with criminal convictions.

The study provides detailed statistics on the types of crime convictions among auditors and their penalty ranges.

The research findings indicate that auditors with criminal convictions tend to be younger, have more clients, and earn higher income.

The study also reveals that firms appointing auditors with criminal convictions tend to have higher leverage and larger size.

Accurate financial reporting is only important for equity and debt investors.

Internal auditors report to the audit committee and oversee the firm’s financial and operating procedures.

Lehman announced a $3.9 billion profit for Q3 of 2008.

The term earnings management is used to describe managers intervening in the reporting of their own financial performance, including practices that violate accepted standards of disclosure.

Real earnings management in a financially distressed firm leads to corporate bankruptcy, or at least speeds up the failing process.

Research evidence suggests that mandatory audit rotation leads to lower audit quality.

External auditors express an opinion on whether financial statements comply with accounting standards.

True or false: Auditing is only important for equity and debt investors in the capital markets.

True or false: Transparency refers to the degree to which the company provides details that supplement and explain accounts reported in statements and filings.

True or false: Accurate financial reporting is critical for all those stakeholders who use financial statements in their decision making.

True or false: Fraudulent financial reporting refers to practices such as knowingly failing to comply with GAAP.

Managers are supposed to manage their earnings in order to mislead stakeholders

Negligent financial reporting involves unintentional errors due to factors such as inadequate experience, training, knowledge, or supervision

IFRS implementation reduces the scope for earnings management

Fraudulent financial reporting refers to practices such as knowingly failing to comply with GAAP

Managers commit financial reporting fraud to avoid a decline in the value of their stocks, stock appreciation rights, and options

Real earnings management in a financially distressed firm leads to corporate bankruptcy, or at least speeds up the failing process

The US government had the legal authority to make a direct capital investment in Lehman

Internal auditors report to the audit committee and oversee the firm’s financial and operating procedures

The term earnings management refers to practices that are legal and generally viewed as ethical

Accurate financial reporting is only important for equity and debt investors

Financial frauds appear to share three properties: inability to meet performance expectations, personal costs of failing to meet expectations, and being able to convince oneself that real performance will improve soon

Lehman Brothers predominantly funded itself through long-term financing

Lehman Brothers predominantly funded itself through long-term financing.

The demise of Lehman Brothers triggered a crisis of confidence in the financial system, ultimately leading to the global financial crisis.

Real earnings management in a financially distressed firm leads to corporate bankruptcy, or at least speeds up the failing process.

External auditors express an opinion on whether financial statements comply with accounting standards.

Unintentional errors in financial reporting decisions are not possible.

Lax governance practices often develop during a long boom, as corporate monitors come to accept high growth as normal, leading to a risk of becoming complacent.

The audit committee within the board is responsible for handling and preparing all accounting-related matters for full board meetings.

IFRS implementation reduces the scope for earnings management.

Managers who commit to financial reporting fraud only have financial incentives for doing so.

Internal controls ensure that financial reports precisely reflect changes in financial position, earnings, and cash flow.

The study challenges the assumption that auditors are homogenous individuals with similar personal characteristics.

Auditors' Risk-Taking Research Findings

Auditors' crime convictions are used as a proxy for their propensity to take risks in personal matters, which reflects their willingness to take audit risks.

Male auditors with criminal convictions are more likely to be employed in non-Big-N audit firms, which are less tolerant of risk-taking auditors.

Firms with major shareholders convicted of crimes are more likely to appoint auditors with criminal convictions.

The research findings indicate that auditors with criminal convictions tend to be younger, have more clients, and earn higher income.

The study also reveals that firms appointing auditors with criminal convictions tend to have higher leverage and larger size.

The bibliography includes works by various researchers on topics such as IQ and audit quality, audit partner rotation, and real earnings management in bankrupt firms.

Auditors with criminal convictions tend to be older, have fewer clients, and earn lower income.

The research paper provides extensive references to related studies on audit quality, earnings management, real activities manipulation, and financial reporting standards.

Auditors with criminal convictions engage in high-risk audits and charge higher audit fees after controlling for other audit-risk variables.

The study challenges the assumption that auditors are homogenous individuals with similar personal characteristics.

IFRS implementation reduces the scope for earnings management.

Accurate financial reporting is only important for equity and debt investors.