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




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. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2006.

Suggested Citation

  • Robert Libby & Mark W. Nelson & James E. Hunton, 2006. "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

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    3. Blacconiere, Walter G. & Frederickson, James R. & Johnson, Marilyn F. & Lewis, Melissa F., 2011. "Are voluntary disclosures that disavow the reliability of mandated fair value information informative or opportunistic?," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 235-251.
    4. repec:eee:reacre:v:20:y:2008:i:c:p:3-25 is not listed on IDEAS
    5. 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.
    6. repec:eee:reacre:v:24:y:2012:i:1:p:33-39 is not listed on IDEAS
    7. 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.
    8. 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.
    9. 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.
    10. repec:eee:advacc:v:31:y:2015:i:1:p:91-95 is not listed on IDEAS

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