The Effects of Managements' Incentives and Auditor Characteristics on Financial Statement Users' Earnings Correction Beliefs

This paper reports the results of an experiment examining financial statement users' earnings correction beliefs about the discovery of a quantitatively immaterial earnings misstatement by the auditor. The SEC contends that companies are reluctant to correct such misstatements when the correction would cause earnings to fall below analysts' forecasts. We examine the extent to which financial statement users' earnings correction beliefs are consistent with SEC concerns over two different time periods - before and after the disclosure of the Enron financial scandal. In the Pre Enron sample, we find that users' materiality beliefs exert the strongest influence on their earnings correction beliefs. In contrast, among the Post Enron sample we find that whether the correction will cause the company to miss meeting analysts' forecast has the strongest influence on financial statement users' earnings correction beliefs. Audit firm size and level of non-audit services had little influence on users' earnings correction beliefs