Business, Management and Accounting
5 years ago

Stronger enforcement may harm financial reporting and audit quality, study finds.

1 view
Journal of Accounting Research
Effects of Increasing Enforcement on Financial Reporting Quality and Audit Quality
Ralf Ewert, Alfred Wagenhofer

Paper Summary

Increasing the strength of public enforcement doesn't always improve financial reporting and audit quality. In a model with a manager, auditor, and enforcement institution, it was found that enforcement and auditing work together in weak enforcement systems but can replace each other in strong systems. Stronger enforcement reduces earnings manipulation, but the impact of different enforcement methods on financial reporting and audit quality varies based on factors like production risk and auditing scope.

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