Essays on Auditor Quality and Non-GAAP Earnings

Chapter 1 provides empirical evidence that auditors may play a role in the disclosure of non-GAAP earnings. Using non-GAAP earnings disclosures hand-collected from firms’ annual press releases, I find that firms are more likely to disclose non-GAAP earnings if their auditors are industry experts. Furthermore, firms with these high quality auditors report low quality non-GAAP exclusions in their reconciliation to GAAP income/loss. I interpret these results as suggesting that managers are more likely to opportunistically disclose non-GAAP earnings when they have high quality auditors. However, I do not find a significant association between auditor quality and the likelihood of non-GAAP earnings meeting or beating financial benchmarks. Taken together, my results suggest a negative relationship between auditor quality and non-GAAP earnings quality, in contrast to the positive effects of auditor quality on GAAP earnings documented in prior literature. These findings contribute to the literature on audit quality and non-GAAP earnings, as well as to the regulatory discussion of whether non-GAAP earnings should be audited.

Chapter 2 investigates the characteristics of the actual disclosed non-GAAP exclusions. Results indicate that except for stock-based compensation, exclusions that increase non-GAAP earnings (i.e. amortization expenses, impairment expenses, restructuring charges, Loss, Mark-down and Mark-offs and other non-GAAP increasing exclusions) are associated with next period operating income, indicating these exclusions are of low quality or may be opportunistic. On the other hand, the non-GAAP decreasing exclusions (i.e. gains, and other non-GAAP decreasing exclusions) are not related to future operating income, and therefore are one-time and informative items. The results provide the first empirical evidence on the quality of the actual non-GAAP exclusions disclosed by companies, contributing to the non-GAAP quality literature. Next, I extend the analyses in Chapter 1. The results indicate that high quality auditors are not only negatively related to the quality of non-GAAP increasing exclusions, but also negatively related to the quality of non-GAAP decreasing exclusions. However, I do not find evidence that firms with high quality auditors are more likely to use non-GAAP increasing exclusions to meet or beat the financial benchmarks. The results in Chapter 1 are further supported.

Many thanks to Christine’s dissertation committee: Committee Chair: Barbara Grein, Ph.D. Associate Professor of Accounting Committee Member: Hsihui Chang, Ph.D. KPMG Professor of Accounting Committee Member: Thomas Chiang, Ph.D. Marshall M. Austin Professor of Finance Committee Member: Natalya Khimich, Ph.D. Assistant Professor of Accounting Committee Member: Mark Vargus, Ph.D. Assistant Professor of Accounting