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Retracted: Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock‐Compensation and Lease Information

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  • ROBERT LIBBY
  • MARK W. NELSON
  • JAMES E. HUNTON

Abstract

We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock‐compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability. These results have implications for the interpretation of prior research on the reliability of recognized and disclosed numbers, for financial‐accounting standard setters who may want to consider the reliability effects of their recognition versus disclosure decisions, and for auditing standard setters who may wish to clarify auditors' responsibilities for preventing misstatements in disclosed amounts.

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  • Robert Libby & Mark W. Nelson & James E. Hunton, 2006. "Retracted: Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock‐Compensation and Lease Information," Journal of Accounting Research, Wiley Blackwell, vol. 44(3), pages 533-560, June.
    • Handle: RePEc:bla:joares:v:44:y:2006:i:3:p:533-560
    DOI: 10.1111/j.1475-679X.2006.00210.x
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    2. Shaw, Kenneth W., 2008. "Revised pension rules and the cost of debt," Research in Accounting Regulation, Elsevier, vol. 20(C), pages 3-25.
    3. Ling Chu & Robert Mathieu & Chima Mbagwu, 2013. "Audit Quality and Banks' Assessment of Disclosed Accounting Information," European Accounting Review, Taylor & Francis Journals, vol. 22(4), pages 719-738, December.
    4. Kothari, S.P. & Ramanna, Karthik & Skinner, Douglas J., 2010. "Implications for GAAP from an analysis of positive research in accounting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 246-286, December.
    5. Norman, Carolyn Strand & Rose, Jacob M. & Suh, Ik Seon, 2011. "The effects of disclosure type and audit committee expertise on Chief Audit Executives' tolerance for financial misstatements," Accounting, Organizations and Society, Elsevier, vol. 36(2), pages 102-108, February.
    6. Wheeler, Stephen & Cereola, Sandra J., 2015. "Auditor scrutiny of unaudited client disclosure outlets: Recognized vs. disclosed financial statement items also appearing in the MD&A," Advances in accounting, Elsevier, vol. 31(1), pages 91-95.
    7. Fried, Abraham N. & Davis-Friday, Paquita Y., 2013. "Economic consequences of mandatory GAAP changes: The case of SFAS No. 158," Advances in accounting, Elsevier, vol. 29(2), pages 186-194.
    8. Meckfessel, Michele & Moehrle, Stephen, 2017. "Self-regulation of the academic accounting literature: The case of James Hunton," Research in Accounting Regulation, Elsevier, vol. 29(1), pages 10-18.
    9. Gaynor, Lisa Milici & McDaniel, Linda & Yohn, Teri Lombardi, 2011. "Fair value accounting for liabilities: The role of disclosures in unraveling the counterintuitive income statement effect from credit risk changes," Accounting, Organizations and Society, Elsevier, vol. 36(3), pages 125-134, April.
    10. Elisabetta Barone & Jacqueline Birt & Soledad Moya, 2014. "Lease Accounting: A Review of Recent Literature," Accounting in Europe, Taylor & Francis Journals, vol. 11(1), pages 35-54, June.
    11. Juha Mäki & Antonio Somoza-Lopez & Stefan Sundgren, 2016. "Ownership Structure and Accounting Method Choice: A Study of European Real Estate Companies," Accounting in Europe, Taylor & Francis Journals, vol. 13(1), pages 1-19, April.
    12. Krische, Susan D. & Sanders, Paula R. & Smith, Steven D., 2012. "Lease transaction structuring, earnings management, and management credibility," Research in Accounting Regulation, Elsevier, vol. 24(1), pages 33-39.

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