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When earnings precede audit, auditors cave, study finds

Tammy Whitehouse | January 23, 2019

In the absence of a strong audit committee, management can get an upper hand over auditors when it releases unaudited earnings results to the market, according to emerging academic research.

A new study out of Indiana University finds auditors, especially less experienced auditors, answering to only moderately effective audit committees feel some pressure to conform to management’s judgments when earnings releases are shared with investors before audits are complete. The study is based on a controlled experiment involving more than 100 “highly experienced” audit partners and senior managers to explore their audit judgments when management publishes preliminary earnings information before auditors are finished with their work.

Before the Sarbanes-Oxley Act, roughly three-fourths of earnings announcements occurred on or after the date of the audit report, the study finds. That has virtually...

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