Auditors Conservative in Regards to Earnings Management

ACCT 612

Auditing

Article Brief 1

This was a very interesting study performed by John E. McEnroe and Martens in regards to earnings management. The purpose of this study was to follow up on an experiment that was previously conducted prior to the enactment of the SOX Act to determine if auditors paid “increased attention to earnings management”. The objective of the research performed was to gauge the level of conservatism used by auditors when presented with various cases that involve earnings management.

The author presented five cases to 33 of the largest firms by revenue. Within the firms, the cases were presented to 500 partners and 500 staff. Of the 500 partners the cases were presented to only 80 participants responded which represents a response rate of 16%. Of the 500 staff the cases were presented to only 96 participants responded which represents a response rate of 19.2%. In each case, respondents were asked to answer two questions 1.) What would you judge your risk of exposure to an SEC investigation to be if the agency was aware of these facts and you were to issue a clean opinion of the financial statements? 2.) What is the likelihood of your issuing a qualified opinion on the financial statements?

The author concludes his research by stating that the “findings suggest several conclusions.” The author finds that auditors have grown more conservative in regards to issuing audit opinions in regards to earnings management than before the SOX Act. The second being respondents didn’t appear to allow the threat of SEC investigations to influence their opinion in the situations presented. If respondents felt that a clean or unclean opinion should be rendered, they would do so regardless of the threat of an SEC investigation. Lastly, the author states that the “trend of the results are encouraging as compared to the Martens and McEnroe (1992) study” done 15 years prior to the research being reported on. Based on the research done, auditors...