Audit Implications of Non-GAAP Reporting

Nicholas J. Hallman, Jaime J. Schmidt, Anne M. Thompson

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate whether non-GAAP reporting affects the audit process and thereby the quality of the related financial statements. First, we provide evidence that auditors in numerous countries, including the United States and the United Kingdom, rely to varying degrees on non-GAAP profit before tax as a benchmark for determining quantitative materiality. Then, using Premium Listed companies on the London Stock Exchange, we document that U.K. auditor reliance on non-GAAP materiality benchmarks often results in a higher quantitative materiality amount and can lower audit quality. Although U.K. auditors appear skeptical of managers’ more aggressive non-GAAP adjustments, auditors adopt more of management's low-quality adjustments when auditor independence is weaker. In sum, our results suggest that non-GAAP reporting can indirectly affect investors by reducing the rigor of the financial statement audit.

Original languageEnglish (US)
Pages (from-to)1947-1989
Number of pages43
JournalJournal of Accounting Research
Volume60
Issue number5
DOIs
StatePublished - Dec 2022

Keywords

  • audit quality
  • auditor materiality
  • auditor retention/turnover
  • non-GAAP earnings

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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