Date of Award
Summer 6-18-2024
Degree Type
Dissertation
Degree Name
Ph.D. in Business Administration (Accounting)
Department
Coles College of Business - School of Accountancy
Committee Chair/First Advisor
Dr. Marc Caylor
Second Advisor
Dr. Divesh Sharma
Third Advisor
Dr. Hyungshin Park
Abstract
Revenue–expense matching, also known as the matching principle, is one of the key concepts in modern financial accounting. Recent research has examined matching in a number of ways, including its association with managerial ability. However, despite the auditor playing a vital role in ensuring revenues are matched to expenses in the period in which they occur, the prior matching literature has not considered the effects of auditor quality. Therefore, this study addresses this critical gap in the literature and bridges research to practice by examining the effects of auditor quality on revenue-expense matching.
The purpose of this study was to evaluate auditor quality’s moderation effect on revenue-expense matching by individually interacting eight different auditor quality proxies as well as an auditor quality composite score to revenue-expense matching expense coefficients. Additionally, this study evaluates whether auditor quality affects the relationship between interest expense decreases and matching, and whether it affects the relationship between special item increases and matching. Lastly, utilizing Demerjian’s managerial ability score, this study evaluates whether auditor quality affects the relationship between managerial ability and revenue-expense matching findings of Cho and Choi (2021).
Using the Dichev and Tang (2008) matching research design for the period 2005-2020, my results indicate significant, positive interactions between industry specialization measures of auditor quality (CITY, NATIONAL, and PARTNER) and one office resource proxy (RESOURCE_CLIENTS) with revenue-expense matching. For the other individual measures of auditor quality, I find an inverse relationship. When utilizing an auditor quality composite score in the primary analysis, I find a significant negative interaction between revenue-expense matching and auditor quality; however, additional analyses show coefficient result changes to a significant, positive interaction with current expense matching when going concern opinions and internal control material weaknesses are omitted from the auditor quality composite score. When I evaluate auditor quality’s effect on interest expense decreases and matching, I find that auditor quality does not have an effect on the relationship between interest expense changes and matching. However, I find that auditor quality does have an effect on the relationship between large special item decreases and matching. Lastly, this study provides evidence that managerial ability and auditor quality serve as complements and have a positive moderation effect on revenue-expense matching.
Auditors are the watchdog of the firm’s financial reporting process. Auditors are immensely impactful in their responsibility to signal to external stakeholders on the GAAP accuracy of audits and firm reporting. GAAP accuracy cannot be ascertained without an evaluation of revenue-expense matching in firms. This research aids in answering the question of how impactful auditors are in the revenue-expense matching process when evaluating firms for GAAP soundness.