The Impact of Constraining Auditor Behavior and Audit Committee Questioning on Non-GAAP Reporting Decisions

Abstract

Corporate managers often pursue voluntary non-GAAP reporting when mandatory reporting is limited, although regulators are concerned with how this reporting is utilized. While the level of flexibility external auditors exhibit during discussions over subjective GAAP reporting choices can influence management's GAAP reporting decisions, it is important to determine if this behavior affects subsequent non-GAAP reporting decisions. Additionally, recent calls for increased audit committee questioning of non-GAAP disclosures may also cause audit committees to influence non-GAAP reporting. In this dissertation, I conduct an experiment to examine how auditor flexibility and audit committee questioning influence non-GAAP preparation and earnings release disclosure choices of senior executives. I predict less flexible auditor behavior will enhance managers' psychological feeling of constraint, while audit committee questioning focused on non-GAAP measures can increase managers' self-assessment of reporting decisions, both of which will translate into more conservative non-GAAP reporting. However, given prior research indicating that corporate governance mechanisms can combine in complex ways, I predict a greater impact of audit committee questioning absent auditor constraint. Results indicate managers make less conservative non-GAAP preparation decisions and disclose more non-GAAP measures in the absence of constraint from inflexible auditors. However, absent this constraint, managers make more conservative non-GAAP preparation choices and present non-GAAP measures less prominently in earnings press releases when the audit committee questions non-GAAP disclosures. These results are driven by a thorough self-assessment of reporting decisions by managers expecting audit committee questioning. This study provides evidence on how external auditors and audit committees influence various voluntary reporting decisions.