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Analysts' Cash Flow Forecasts, Audit Effort, and Audit Opinions on Internal Control

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  • Mike Qinghao Mao
  • Yangxin Yu

Abstract

We examine the economic impact of analysts’ cash flow forecasts by looking at how external auditors respond to financial analysts’ issuance of cash flow forecasts. Using a differences-in-differences approach, we find that financial analysts’ initiation of cash flow forecasts leads to reduced auditor fees and audit report lags. Moreover, after cash flow forecast initiation, firms report fewer Section 404(b) internal control weakness disclosures. These findings suggest that cash flow forecasts constrain earnings manipulation and improve management accounting behavior, thereby reducing inherent and control risk and strengthening firms’ internal control over financial reporting.

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  • Mike Qinghao Mao & Yangxin Yu, 2015. "Analysts' Cash Flow Forecasts, Audit Effort, and Audit Opinions on Internal Control," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 635-664, June.
    • Handle: RePEc:bla:jbfnac:v:42:y:2015:i:5-6:p:635-664
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    Cited by:

    1. Hyun Min Oh & Ho young Shin, 2019. "A Study on the Relationship between Analysts’ Cash Flow Forecasts Issuance and Accounting Information: Evidence from Korea," Sustainability, MDPI, vol. 11(12), pages 1-26, June.
    2. Hyun Min Oh & Sam Bock Park & Jong Hyun Kim, 2020. "Do Analysts’ Cash Flow Forecasts Improve Firm Value?," IJFS, MDPI, vol. 8(4), pages 1-25, October.
    3. Chalmers, Keryn & Hay, David & Khlif, Hichem, 2019. "Internal control in accounting research: A review," Journal of Accounting Literature, Elsevier, vol. 42(C), pages 80-103.
    4. Estibaliz Goicoechea & Fernando Gómez-Bezares & José Vicente Ugarte, 2021. "Improving Audit Reports: A Consensus between Auditors and Users," IJFS, MDPI, vol. 9(2), pages 1-25, April.
    5. Yanming Cao & Zhongwei Zhao & Ning Wang & Liming Zhao, 2022. "Sustainable Development of Audit Market: Benefits of Audit Price Deregulation in China," Sustainability, MDPI, vol. 14(16), pages 1-15, August.
    6. Jingyu Yang & Hai Wu & Yangxin Yu, 2021. "Distracted institutional investors and audit risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3855-3881, September.

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