Corporate employment, red flags, and audit effort

Jian Cao, Xin Luo, Wenjun Zhang

Research output: Contribution to journalArticlepeer-review

17 Citations (Scopus)

Abstract

U.S. regulatory agencies and congressional oversight committees have expressed concerns that auditors often neglect red flags embedded in the operating characteristics of firms that misstate their financial reports. This study examines whether labor employment decisions, a major part of a firm's operations, help predict accounting improprieties and consequently play a role in audit planning and pricing. We find that negative abnormal employment changes are associated with a higher likelihood of subsequent financial restatements, accounting irregularities, and lawsuits related to accounting fraud, and generally require greater effort from auditors as manifested by higher audit fees and longer audit report lags. Positive abnormal employment changes are associated with subsequent restatements and longer audit report lags, but not associated with fraud or audit fees. Taken together, the results are consistent with auditors recognizing the individual misstatement risks pertaining to companies’ employment decisions. These results suggest that standard setters, regulators, and practitioners should devote more attention to operational statistics to identify potential red flags.

Original languageEnglish
Article number106710
JournalJournal of Accounting and Public Policy
Volume39
Issue number1
DOIs
Publication statusPublished - Jan 1 2020

Bibliographical note

Funding Information:
We thank Professor Divesh Sharma (Editor), two anonymous reviewers, Feng Chen, David Fang, Sharmila Vishwasrao, Hua Xin, Alex Lyubimov, and participants at the CAAA 2018 Annual Conference and AAA 2018 Annual Meeting for helpful comments on various drafts of this paper, as well as Tyler Carlson, Tracie Frost, and Lin Wang for research assistance. Cao acknowledges the financial support from FAU College of Business Stone Fellowship and Dean's Distinguished Research Fellowship.

Publisher Copyright:
© 2019 Elsevier Inc.

ASJC Scopus Subject Areas

  • Accounting
  • Sociology and Political Science

Fingerprint

Dive into the research topics of 'Corporate employment, red flags, and audit effort'. Together they form a unique fingerprint.

Cite this