DOES AUDITING REDUCE BIAS IN FINANCIAL-REPORTING - A REVIEW OF AUDIT-RELATED ADJUSTMENT STUDIES

Do year-end audit adjustments reduce bias in management's assertions a bout earnings and assets, and if so, by how much? These and related qu estions are addressed by an analysis of nine data sets of audit-relate d adjustments from more than 1,500 audits across 15 audit years. Inclu ded are clients of all of the Big Six CPA firms and a broad cross sect ion of industries. Summary statistics are tabulated by direction of ef fect on earnings, by selected accounts, and by magnitude. Overall, aud it-related adjustments show an overwhelmingly negative effect on preau dit net earnings and net assets. The average aggregate adjustment redu ces earnings and assets by two to eight times the minimum amount that would materially misstate the financial statements. Thus, the year-end audit is seen as directly reducing positive bias in preaudit net earn ings and net assets as well as improving the precision of measurement. This implies that, other things equal, if auditing had not been appli ed, then the financial reports of these firms would have tended to sho w materially inflated earnings and assets.