Does the Work of Accountants have an Economic Impact on the Companies they Audit?
In an effort to determine the impact that the work of accountants has on the companies they audit, Edward Douthett, associate professor of accounting at George Mason University School of Business, recently conducted two empirical studies examining the effects of audit quality for publicly-held companies listed on international and domestic U.S. stock exchanges. In the first study, Douthett examined whether or not the use of the auditor’s personal signature in signing off on the credibility of his client’s financial statement improves audit quality. In the second study, Douthett examined whether or not venture capitalists influence the demand for higher quality auditing for their portfolio companies that first sell stock in an initial public offering (IPO).
In some international capital markets, unlike U.S. capital markets, auditors are required to sign off on financial statements using their own personal signature instead of their firm’s name. Douthett said, “Our preliminary findings indicate that the auditor tends to perform a higher quality audit when his personal signature is used instead of his firm’s name. We believe that the use of a personal signature puts the auditor’s personal reputation at stake, providing an incentive to do a better audit.” Douthett’s research may have implications for U.S. regulators who are currently considering a requirement for the audit partner-in-charge to personally sign the financial statements of their publicly owned clients.
In another study, Douthett finds that venture capitalists influence the demand for higher quality audits in order to protect their reputation as investment advisors. Venture capitalists, perceived as having “deep pockets,” face additional investor litigation risk if the financial statements of their portfolio company are not fairly presented at the time of the IPO. Douthett said, “Auditors, by performing more audit work, can provide more assurance about the fairness of the financial statements, which helps to avoid investor litigation. Thus, we predict that venture capitalists will demand more auditing services for their IPOs in order to minimize the risk of stockholder litigation, and therefore, protect the venture capitalists’ reputations as investment advisors and suppliers of risk capital. The results of this study could inform capital market participants about the investment quality of an initial public offering that is backed by a venture capitalist.
Douthett’s research offers an in depth view of how important the quality of an audit can be for a company and the economic impact that results from it. Results from these studies may very well change the way a company now focuses on their audit, and may encourage companies to demand a higher quality audit in the future.
Edward B. Douthett, Jr. is an associate professor in the School of Business and holds the Dixon Hughes Goodman Faculty Fellowship. He received a PhD and MBA from the University of Georgia, and a BS from the Pennsylvania State University. Douthett’s research focuses on the economic effects of accounting and auditing in U.S. and international capital markets. His publications have appeared in leading academic journals. At George Mason University, Douthett teaches courses in managerial and cost accounting. Prior to joining the faculty at George Mason University, he served on the faculty of Texas Christian University and worked at Exxon Corporation in various positions overseeing financial analysis and reporting for operating units in oil and gas production and chemical manufacturing. Click here for full bio.