TY - BOOK

T1 - Essays on financial misreporting and audit quality

AU - Rohmann, Maximilian

PY - 2023

Y1 - 2023

N2 - This dissertation comprises four articles. The first three articles analyze auditing research questions using analytical models. The fourth article uses an experimental empirical research method to analyze the rationalization of misreporting. The first article analyzes how enforcement institutions’ inspection focus disclosure influences the managers’ misreporting, the auditors’ effort choices, and thus the financial reporting quality. We, thereby, show that focus disclosure can enhance or deteriorate financial reporting quality. We also highlight conditions under which focus disclosure can yield a higher financial reporting quality and how enforcement institutions can influence these conditions. The second article analyzes how third-party auditor hiring (e.g., by a stock exchange) affects entrepreneurs’ misreporting choices and overall investment efficiency. I show that even though independence issues could be solved, third-party auditor hiring can enhance or deteriorate investment efficiency. Third-party hiring can harm investment efficiency as it reduces misreporting, and thus, misreporting cannot be used to compensate a conservative accounting system to prevent underinvestment. Further, I highlight conditions under which third-party hiring yields a higher or lower investment efficiency. The third article analyzes driving forces for audit firm split-ups into stand-alone audit and advisory firms, such as the once planned EY split-up. In addition, we explore the potential consequences of audit firm split-ups on audit quality and the role of enforcement strength. We find that three effects determine split-up preferences and its consequences: First, as the advisory partner wants to prevent an adverse audit opinion to keep the client, independence problems arise. Second, as the advisory partner loses reputation in case of an audit failure, an advisory project creates positive effort incentives. Third, spillovers from audit to advisory lower the advisory partner’s project costs. Enforcement strength, thereby, determines which of the first two effects dominates because enforcement strength determines effort incentives. These effects and, thus, enforcement strength determine the overall effect of audit split-ups on audit quality. The fourth article analyzes the rationalization of financial misreporting. Using a 2x2 between-subjects experiment, we find that an externally caused bad environmental state causes a higher misreporting likelihood. This effect only occurs if participants are aware of other environmental states. Observing other states where it is easier to achieve a bonus, managers in the bad environmental state feel a greater sense of entitlement and misreport more. Thus, we find that entitlement works as a mediator for financial misreporting.

AB - This dissertation comprises four articles. The first three articles analyze auditing research questions using analytical models. The fourth article uses an experimental empirical research method to analyze the rationalization of misreporting. The first article analyzes how enforcement institutions’ inspection focus disclosure influences the managers’ misreporting, the auditors’ effort choices, and thus the financial reporting quality. We, thereby, show that focus disclosure can enhance or deteriorate financial reporting quality. We also highlight conditions under which focus disclosure can yield a higher financial reporting quality and how enforcement institutions can influence these conditions. The second article analyzes how third-party auditor hiring (e.g., by a stock exchange) affects entrepreneurs’ misreporting choices and overall investment efficiency. I show that even though independence issues could be solved, third-party auditor hiring can enhance or deteriorate investment efficiency. Third-party hiring can harm investment efficiency as it reduces misreporting, and thus, misreporting cannot be used to compensate a conservative accounting system to prevent underinvestment. Further, I highlight conditions under which third-party hiring yields a higher or lower investment efficiency. The third article analyzes driving forces for audit firm split-ups into stand-alone audit and advisory firms, such as the once planned EY split-up. In addition, we explore the potential consequences of audit firm split-ups on audit quality and the role of enforcement strength. We find that three effects determine split-up preferences and its consequences: First, as the advisory partner wants to prevent an adverse audit opinion to keep the client, independence problems arise. Second, as the advisory partner loses reputation in case of an audit failure, an advisory project creates positive effort incentives. Third, spillovers from audit to advisory lower the advisory partner’s project costs. Enforcement strength, thereby, determines which of the first two effects dominates because enforcement strength determines effort incentives. These effects and, thus, enforcement strength determine the overall effect of audit split-ups on audit quality. The fourth article analyzes the rationalization of financial misreporting. Using a 2x2 between-subjects experiment, we find that an externally caused bad environmental state causes a higher misreporting likelihood. This effect only occurs if participants are aware of other environmental states. Observing other states where it is easier to achieve a bonus, managers in the bad environmental state feel a greater sense of entitlement and misreport more. Thus, we find that entitlement works as a mediator for financial misreporting.

U2 - 10.15488/14834

DO - 10.15488/14834

M3 - Doctoral thesis

CY - Hannover

ER -