@article{976cd80df3b54c3fa120fcbbbe1ee229,
title = "Audit Implications of Non-GAAP Reporting",
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{\textquoteright} 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.",
keywords = "audit quality, auditor materiality, auditor retention/turnover, non-GAAP earnings",
author = "Hallman, {Nicholas J.} and Schmidt, {Jaime J.} and Thompson, {Anne M.}",
note = "Funding Information: Accepted by Christian Leuz. We thank a Big 4 audit firm (who requested anonymity) for providing us access to partners willing to discuss how materiality decisions are made in the United States. We thank two anonymous reviewers, Dorsey Baskin, Nerissa Brown, Ted Christensen, Alex Johanns, Jeff Johanns, Bill Kinney, Clive Lennox, Mark Peecher, Sam Ranzilla, Dan Sunderland, and workshop participants at the International Symposium on Audit Research, Ohio State University, Oklahoma State University, the PCAOB/JAR Conference on Auditing and Capital Markets, Texas Christian University, the University of Massachusetts‐Amherst, the University of Washington, Wichita State University, and the University of Illinois at Urbana‐Champaign for helpful comments. We are grateful for research funding from the McCombs Undergraduate Research Assistant Program. We thank Jonathan Bouwhuis, Jing Cui, Joel Garcia, Minjae Kim, Kayla Kimrey, Shelby Krummel, Yuxi Li, Sabrina Lim, Madison Macica, Alejandra Oseguera, Yitong Pan, Parth Patel, Bitian Qi, Sharmin Sharif, Nick Williams, Annie Xue, Hongshuo Zhang, and Boyan Zhu for research assistance. Jaime Schmidt acknowledges financial support from the KPMG Centennial Fellowship in Accounting and Anne Thompson acknowledges financial support from the Arthur Andersen Faculty Fellowship. An online appendix to this paper can be downloaded at https://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements . Publisher Copyright: {\textcopyright} 2022 The Chookaszian Accounting Research Center at the University of Chicago Booth School of Business.",
year = "2022",
month = dec,
doi = "10.1111/1475-679X.12433",
language = "English (US)",
volume = "60",
pages = "1947--1989",
journal = "Journal of Accounting Research",
issn = "0021-8456",
publisher = "[Accounting Research Center, Booth School of Business, University of Chicago, Wiley]",
number = "5",
}