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Complementarity between Audited Financial Reporting and Voluntary Disclosure: The Case of Former Andersen Clients

By: Richard Frankel, Alon Kalay, Gil Sadka and Yuan Zou
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Abstract

Prior literature presents various perspectives on the role of financial reporting. One view is that mandatory periodic reporting disciplines managers and encourages timely voluntary disclosure. We examine this "confirmation hypothesis" using the shock to financial reporting quality experienced by Arthur Andersen clients forced to switch auditors. Consistent with the confirmation hypothesis, we find that former Andersen clients increase disclosure after they change auditors. They increase forecasting frequency and enhance forecasting precision and specificity. We present additional cross-sectional evidence that shows Arthur Andersen clients with larger increases in financial reporting quality increased their disclosure by relatively more, even within the sample of Arthur Andersen clients. We supplement our main findings with a battery of tests to reduce the possibility that alternative shocks and uncertainty drive our results. Our findings support complementarity between financial reporting quality and voluntary disclosures.

Keywords

Financial Disclosure; Mandatory Reporting; Reliability; Voluntary Disclosure; Financial Reporting; Quality; Corporate Disclosure

Citation

Frankel, Richard, Alon Kalay, Gil Sadka, and Yuan Zou. "Complementarity between Audited Financial Reporting and Voluntary Disclosure: The Case of Former Andersen Clients." Accounting Review 96, no. 6 (November 2021): 215–238.
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About The Author

Yuan Zou

Accounting and Management
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More from the Authors
  • Communicating Corporate Culture in Labor Markets: Evidence from Job Postings By: Joseph Pacelli, Tianshuo Shi and Yuan Zou
  • Passing the Mic: Career and Firm Outcomes of Executive Interactions By: Wei Cai, Ethan Rouen and Yuan Zou
  • Public Disclosure of Private Meetings: Does Observing Peers' Information Acquisition Affect Analysts' Attention Allocation? By: Yi Ru, Ronghuo Zheng and Yuan Zou
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