Purpose

The purpose of this study is to investigate whether audit quality is associated with the speed with which managers revise earnings forecasts to arrive at the actual earnings through the lens of the auditor selection theory. This study examines this relationship in a unique institutional setting, Japan, where nearly all managers disclose earnings forecasts.

Design/methodology/approach

The authors pioneer an empirical proxy to capture the speed of management forecast revisions based on well-established principles from the finance and disclosure literatures. This proxy is tested alongside other disclosure proxies (namely, accuracy, frequency and timeliness) to assess the influence of audit quality on managerial forecasting behavior.

Findings

This empirical analysis shows that forecast revision speed is higher for firms that select higher-quality auditors. While firms that select higher-quality auditors revise forecasts in a more timely fashion, these firms revise less frequently. Moreover, the authors find that the influence of audit quality on forecast revisions is asymmetric. Specifically, the analysis of downward forecast revisions shows that higher-quality auditors are associated with firms that disclose bad news via forecasts revisions faster, more frequently and in a more timely fashion. However, the analysis of upward forecast revisions shows that higher-quality auditors have no effect on the speed with which firms disclose good news via forecast revisions, even though they are associated with less frequent but more timely forecast revisions. These findings have important implications for prior studies that consistently document an asymmetric response of the stock market to good news and bad news.

Originality/value

The authors provide evidence on the relationship between audit quality and management earnings forecasts using a novel and intuitive measure that captures forecast revision speed. This measure speaks to the growing interest in understanding the notion of speed and timing of voluntary disclosures. This study provides a more robust and comprehensive measure of the speed with which managers revise their earnings forecasts to arrive at the actual earnings. Furthermore, this study is among the first to document an asymmetric effect of audit quality on the type of news disclosed in forecast revisions.

Purpose

The purpose of this study is to examine the relationship between going-concern (GC) opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit rating agencies (CRAs) – Standard & Poor’s (S&P) and Moody’s. This question is relevant because there have been suggestions that auditors and CRAs should become more similar to each other, and because the two largest CRAs have different ownership structures that could affect their ratings.

Design/methodology/approach

Univariate and multivariate analyses are performed using a sample of firms that filed for bankruptcy between January 1, 2002 and December 31, 2013 that also had an audit opinion signed during the 12 months prior to bankruptcy, along with a credit rating issued by either or both S&P and Moody’s. Both influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time.

Findings

Both audit reports and credit ratings influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time.

Originality/value

Auditors are more likely to issue GC opinions when there is a downgrade to the credit rating, and CRAs are more likely to downgrade their ratings when there is a GC opinion. The study highlights that CRAs with different ownership structures provide different credit rating outcomes.

We investigate the relation between the degree of audit partner narcissism and income‐increasing earnings management of client firms at both the individual and team levels of analysis in Japan. With the use of the size of audit partner signatures as a proxy for the degree of narcissism, we find that audit partner narcissism is negatively related to income‐increasing earnings management. Our team level of analysis shows that audit team partner narcissism is also negatively related to income‐increasing earnings management. When an audit engagement team has more than one narcissistic partner, we establish that narcissism is only effective in constraining income‐increasing earnings management if the lead partner in the team is narcissistic. Furthermore, our team level of analysis shows that the size of the engagement team has a moderating effect on lead partner narcissism, suggesting that narcissistic leaders tend to behave differently in larger teams.