The Potential Impact of More Frequent Financial Reporting and Assurance:

User, Preparer & Auditor Assessments

IndependentAssurance

EarningsQuality

StockMarket

Beleaguered &Bewildered

CFO

Frequent Reporting

More Frequent Reporting

Recent advances in information and communication technology (ICT) infrastructures make it potentially feasible to deliver external financial statements on a more frequent basis than the current quarterly interval. XBRL Internet Bandwidth ERPs

More Frequent Reporting

Demand pressures have led the FASB and the SEC to recognize the need for and inevitability of more frequent financial reporting.

FASB

SEC

More Frequent Reporting Purpose of current study is to investigate

the assessments of four key constituent groups:

regarding the impact of more frequent external financial statement reporting on:

Investors ControllersAnalysts

Earnings Quality Stock Market

Auditors

More Frequent Assurance

Rapid advances in ICT are expected to eventually change the auditing function from traditional annual opinions and quarterly reviews to a continuous integrated set of assurance services (Kogan et al. 1999; Vasarhelyi 2002).

More Frequent Assurance

During the transition from the current state to continuous assurance, however, auditor assurance is likely to extend first to more frequently issued financial statements.

Investors CFO

Auditors

More Frequent Assurance Second purpose of current study is to

investigate the assessments of four key constituent groups:

regarding the impact of more frequent independent auditor assurance on:

Investors ControllersAnalysts

Earnings Quality Stock Market

Auditors

More Frequent Reporting &Quality of Earnings Earnings management, reflecting a poor

quality of earnings, refers to the selection of accounting estimates, accruals, disclosures and choices that bias reporting; thus, do not accurately reflect underlying economic activity (Healy and Wahlen 1999).

Would you likeyour books rare,medium or well-done?

High Earnings Quality

Events

More Frequent Reporting & Quality of Earnings As the reporting interval becomes more

frequent it will become increasingly more difficult to manage earnings, as assumptions related to estimates, accruals, disclosures and choices would be integrated into the accounting information system, perhaps at the transaction level.

Thus, a change in assumptions would be prospectively applied, not retrospectively.

Estimates, Accruals, Disclosures, Choices

Transactions

More Frequent Reporting & Quality of Earnings

Also, frequent swings in estimates, accruals, choices would become obvious to market participants through proper disclosures.

Disclosures

Choices

Hypothesis One (H1) Thus, more frequent reporting is

expected to dampen aggressiveness with respect to accounting estimates, accruals and choices, and increase the overall quality of earnings and informativeness of disclosures.

Would you likeyour books rare,medium or well-done?

High Earnings Quality

Even

ts

Hypothesis One (H1) One of the information attributes

considered under the information economics framework and Statement on Accounting Concepts #3 is timeliness, which is a component of ‘relevance’; thus,

more frequent reporting should improve the decision

usefulness of financial statements.

Rapid Delivery of Financial Statements

More Frequent Reporting & Market Effects When information is not released on a

timely basis, events may occur during the period of which investors unaware.

Even

ts

More Frequent Reporting & Market Effects Thus, uncertainty between reporting

periods can heighten information risk, leading to lower levels of consensus and significant changes in stock prices and portfolio mixes once information is released.

Analyst Disagreement Stock Price Volatility

Hypothesis Two (H2) More frequent financial statement

reporting will increase analyst consensus and decrease stock market volatility

More Frequent Assurance & Quality of Earnings There is a large body of research

supporting the value of the assurance function in: improving the quality of information

(“information hypothesis”), monitoring management (“agency

hypothesis”), and spreading investment risk by holding

the assurer as a potential claimant in litigation (“insurance hypothesis”).

(e.g., Fama and Laffer, 1971; Wallace 1980, 1987; Chow, 1982; Watts and Zimmerman, 1986; Abdel-Khalik, 1993; Willenborg, 1999).

Assurer

More Frequent Assurance & Quality of Earnings H3: Thus, more frequent assurance is

expected to dampen aggressiveness with respect to accounting estimates, accruals and choices, and increase the informativeness of disclosures, decision usefulness of financial statements and overall quality of earnings.

More Frequent Assurance & Quality of Earnings H4: More frequent assurance will

increase analyst consensus and decrease stock market volatility

RISK

Planned Supplemental Analyses

To what extent will the hypothesized effects (H1 through H4) differ across stakeholder groups?

Investors

ControllersAnalysts

Auditors

Research Design

Monthly Daily

Reporting Frequency(Between-Subjects)

Ass

uran

ce

(Withi

n-Sub

ject

s)

No

Yes

Treatment Group

Reporting Frequency

ASSURANCE

Yes

Control Group

Monthly Daily

Research Method

Treatment Group Control Group

Envelope #1

Read Case MaterialsMonthly or DailyAssumed No AssuranceResponded to 8 Items

Read Case MaterialsMonthly or DailyAssumed AssuranceResponded to 8 Items

Envelope #3

Manipulation ChecksGeneral Items (5)DemographicsDebriefing

Meyers-Briggs (20)Debriefing

Envelope #2

Read Case MaterialsMonthly or DailyAssumed AssuranceResponded to 8 Items

Manipulation ChecksGeneral Items (5)Demographics

Response Scales

To what extent will more frequent monthly (daily) external financial reporting affect the decision usefulness of financial information for investors, creditors, and other users?

-5 -4 -3 -2 -1 0 1 2 3 4 5

SignificantlyLess

Useful

SignificantlyMoreUseful

NoEffect

Sample Composition

InvestorsControllers Analysts

n=84 n=30 n=80 n=21N=215

Median Ages 25-30 36-40 31-35 25-30

Mean Yrs. Exp. 7.50 14.03 3.85 5.74

Gender 86 (40%) 129 (60%)

Auditors

Sample Distribution

Monthly Daily

Reporting Frequency(Between-Subjects)

Ass

uran

ce

(Withi

n-Sub

ject

s)

No

Yes

Treatment Group

Reporting Frequency

ASSURANCE

Yes

Control Group

Monthly Daily

n=161

n=54

n=79 n=82

N=215

n=25 n=29

27 Auditors27 MBA’s

Demand Effects

Monthly Daily

Reporting Frequency(Between-Subjects)

Ass

uran

ce

(Withi

n-Sub

ject

s)

No

Yes

Treatment Group

Reporting Frequency

ASSURANCE

Yes

Control Group

Monthly Daily

Demand Effects

Monthly Daily

Reporting Frequency(Between-Subjects)

Ass

uran

ce

(Withi

n-Sub

ject

s)

No

Yes

Treatment Group

Reporting Frequency

ASSURANCE

Yes

Control Group

Monthly Daily

MANCOVA Testing

1. Frequency

2. Subgroup

3. Interaction [1x2]

4. Covariates

No Assurance Assurance General Items

<.01

<.05

=.79

=.35

<.01

<.01

=.66

=.28

<.01

<.01

=.01

=.46

Hypotheses: General Pattern of Means

Aggressiveness of:AccrualsEstimatesPrinciples

Monthly Daily Monthly Daily w/o A w/o A w/A w/A

-------- No Effect ----------

Slightly < Moderately More More

Slightly > Moderately Less Less

Disclosure Informativeness

Overall Earnings QualityInformation Usefulness

Stock Price Volatility

< Considerably More

> Considerably Less

Analyst Consensus

------------------No Effect---------------------

Slightly > Moderately Less Less

H 1 H 3

> Considerably Less

H 2Slightly < Moderately More More

H 4 < Considerably More

Other Items: General Pattern of Means

Investors ControllersAnalysts

TechnicalFeasibility

|---------- Monthly YES ----------------------------||--------- Daily NO ---------------------------------|

|--------- Monthly Slightly Lower ----------------||--------- Daily Moderately Lower ------------|

Cost of Capitalw/o Assurance

Net Benefitw/ Assurance

|--------- Monthly YES -------------| |---NO---||--------- Daily NO ---------------------------------|

Net Benefitw/o Assurance

|--------- Monthly YES -------------| |---NO---||--------- Daily NO ---------------------------------|

|--------- Monthly Moderately Lower ------------||--------- Daily Considerably Lower ----------|

Cost of Capitalw/ Assurance

Auditors

Limitations

Single Setting (Generalizability) Limitation on open-ended questions Convenience Samples Many more interesting questions,

too little time. Stimulus-Response study—we still

do not understand ‘why’

Key Findings

General agreement across four salient constituent groups that more frequent reporting and assurance might:

Dampen aggressive accounting behavior Increase quality of reported earnings Enhance informativeness of financial

information Improve analyst consensus Decrease stock price volatility Yield net benefit to firms (monthly only) Lower cost of capital

Future Research

Need more studies examining how (near) continuous reporting and assurance might affect human decision-making processes & behavior

What are the negative ramifications of (near) continuous reporting on firms, such as liability and competitiveness concerns?

Should the SEC mandate more frequent reporting and/or assurance – why?