Read All About It: Do Auditors Respond to Press Visibility?

Open Access
Author:
Penn, Michael Wayne
Graduate Program:
Business Administration
Degree:
Doctor of Philosophy
Document Type:
Dissertation
Date of Defense:
July 27, 2012
Committee Members:
  • Orie Edwin Barron, Dissertation Advisor
  • Orie Edwin Barron, Committee Chair
  • Jeremiah Ross Green, Dissertation Advisor
  • Mark William Dirsmith, Committee Member
  • Dan Givoly, Committee Member
  • Francis Erin Dardis, Committee Member
Keywords:
  • Business Press
  • Audit Effort
  • Audit Fees
Abstract:
I examine whether auditors respond to business press coverage. Using the number of articles covering a client firm (a proxy for visibility) I find multiple forms of evidence that auditors do respond to the visibility of their clients. I first find that auditors charge higher audit fees for clients with higher visibility incremental to other determinants of fees. These increased fees are consistent with predicted increases in auditor effort and perceived auditor business risk. The audit fee evidence is corroborated using other proxies for auditor decisions: audit report modifications, the level of accruals, and auditor turnover. The evidence suggests that auditors respond to risks driven by press coverage. Additionally, I find evidence of costs of media coverage to auditors. First, I find that the propensity for a client firm to receive an AAER from the SEC is increasing in the prior year’s visibility. Second, I find that the total revenue an auditor receives from its entire client portfolio is decreasing with the absolute dollar value of restatements by high visibility client firms. These findings indicate that auditors must consider both reputation and monetary concerns in audits of clients subject to high media visibility. I conclude that the press not only participates in the external monitoring of financial reporting, but that through its influence on official external monitors the press actually also affects financial reporting.