Search

Accounting regulations require firms to separately disclose the profits and losses from discontinued operations. These discontinued operations are typically excluded from the definition of income used by investors, analysts, and others. Barua, Lin, and Sbaraglia (2010) show that managers manipulate earnings by shifting core expenses into discontinued operations. In light of recent changes in the regulations pertaining to this item, we reexamine this finding. The new rules, which change the criteria for what can be considered discontinued and the associated disclosure requirements, substantially reduce any significant evidence of earnings management using discontinued operations. A decline in the manipulation of large negative discontinued operations drives this reduction. We also find that the new rules decrease the frequency and persistence of discontinued operations. [ABSTRACT FROM AUTHOR]

The study examines the impact of non-audit services (NAS) on audit quality. It is motivated by the new re-strictions on the joint provision of audit and NAS for EU Member State (Federal Ministry for Economic Affairs and Energy 2016, Regulation 2014, EC 2011) which are based on concerns that auditors' provided NAS may impair auditor independence. Empirical evidence in Germany as well as in other Continental European countries is limited. We use a sample of 2567 firm-year observations from German listed firms between 2006 and 2013 and test the association between the level and type of non-audit service fees (NAS fees) paid to the auditor and audit quality. Earnings management is used as a proxy for audit quality. The findings indicate that the higher levels of NAS fees negatively affect audit quality. Separating different types of NAS shows that especially other assurance and other consultancy services have a negative impact on audit quality, whereas the level of tax services has no impact on audit quality. In further tests we show that cap on NAS fees at 70% of averaged three prior years audit fees imposed by the EU fails to prevent an impairment of audit quality, but that a moderate level of NAS does not result in lower audit quality compared to audit quality of auditors providing no NAS. [ABSTRACT FROM AUTHOR]

Although an increasing amount of empirical research has been linked to the impact of management control and governance on corporate social responsibility (CSR) issues since the financial crisis of 2008/09, heterogeneous results have characterised this research field. Regarding the group level of corporate governance, the efficacy of board committees (e.g., audit, compensation or CSR committees) has been included in recent research designs. However, analyses of corporate governance at the individual level are related to the effects of top management members [e.g., chief executive officer (CEO), chief financial officer (CFO) or chief sustainability officer (CSO)] on CSR outcomes. This paper aims to convey a detailed understanding of sustainable management control's impact as CSR-related board expertise. In more detail, we focus on the influence of both CSR committees and CSOs on three CSR measures mainly analysed in empirical-quantitative research: (1) CSR reporting; (2) CSR assurance (CSRA); and (3) CSR performance. We motivate our analysis with increased relevance from practical, regulatory and research perspectives, and we employ a systematic literature review of the symbolic vs. substantive effects of sustainability-related board composition. Based on our theoretical model (legitimacy theory, stakeholder theory and upper-echelons theory), we selected 48 quantitative peer-reviewed empirical studies on this research topic. Our analysis shows that CSR committees positively influence CSR reporting and performance. Thus, there are indications that the implementation of a CSR committee is not a symbolic act, but instead substantively contributes to CSR activities. However, in light of inconclusive empirical research results and a lack of studies that have analysed CSO-related effects, a notable research gap has been identified. Moreover, we note the main limitations of prior research in this review and develop an agenda with useful recommendations for future studies. [ABSTRACT FROM AUTHOR]

The aim of the research is to determine if the audit fees are statistically significantly different between the audit companies and vary, depending on the size of client and audit company. We find that for large auditees the average audit fees of the Big 4 Group did not statistically significantly deviate from normative audit fees, even surpass them, but not statistically significant. On average, small audit firms when auditing large auditees do not meet the predicted normative audit fees, and this deviation is statistically significant. Also, we confirm that the Big 4 auditing companies (KPMG, E & Y, Deloitte and PwC) were, statistically, significantly more likely to charge higher audit fees than a small auditing company would charge. The paper contributes to the literature to give users a clear indication about what average audit fees are typical of the Slovenian audit companies and which audit company is at the forefront.

This study investigates the influences of companies' cultural diversity on International Financial Reporting Standards (IFRS) adoption in Nigeria. The diverse response to IFRS adoption is a phenomenon that necessitates further investigation to understand the reasons some companies adopt IFRS while others do not. Previous studies have investigated preparers of financial statements' adoption of IFRS and there is a dearth of research on the role of cultural difference on IFRS adoption. However, little has been explored to understand the impacts of cultural variables on IFRS adoption. Using a self-administered survey questionnaire and logistic regression, this study identifies that financial statement preparers' levels of professionalism, transparency, flexibility, secrecy, uniformity and the statutory control dimensions of cultural factors impact IFRS adoption at different magnitudes. The study notes that IFRS adoption can only be successful when accountants develop the relevant technical expertise in IFRS prior to implementation. This includes practical training in IFRS requirements, accounting assets and liabilities valuation, recognition of income or liabilities and disclosure of economic events before and after the reporting period consistent with IFRS 10. [ABSTRACT FROM AUTHOR]

This paper studies the effects of disclosing the audit engagement partner's identity on individual and partnership incentives and overall audit quality. We model a collective decision problem, incorporating individual engagement partners' preferences with the partnership's choice of internal quality control. In our model, disclosure of the individual engagement partner (on Form AP) influences the probability that clients observe individual partners' past performance. While Form AP disclosure increases individual partners' incentives to provide high-quality audits for a given level of internal quality control within the partnership, it may simultaneously decrease the partnership's incentives to maintain good internal quality control systems, leading to a net degradation in audit quality. Our paper also demonstrates that the level of external audit oversight is critical in determining whether Form AP disclosure enhances audit quality. [ABSTRACT FROM AUTHOR]

Prior literature documents that CEOs are rewarded for any positive component of income and are partially shielded from negative special items. However, the incidence of and rules pertaining to nonrecurring items significantly changed over the last two decades, calling for a reassessment of earlier research. This paper finds that executives now benefit less from positive nonrecurring items and are penalized more for negative special items, compared to earlier periods. The predictive value of the components of income helps explain this shift. Hand-collected data indicates that compensation committees are more likely to include a component of income that can predict future earnings in their CEO bonus performance measures. Changes in the predictive value of the nonrecurring components of income over time contribute to shifts in their treatment in calculating CEO pay. [ABSTRACT FROM AUTHOR]

Politicians frequently intervene in the regulation of financial accounting. Evidence from the accounting literature shows that regulatory capture by special interests helps explain these interventions. However, many accounting rules have broad economic or social consequences, such as their effects on income distribution or private sector subsidies. The perception of these consequences varies with a politician's ideology. Therefore, if accounting rules produce those consequences, ideology plausibly spills over and explains a politician's stance on the technical accounting issue, beyond special interest pressure. We use two prominent U.S. political debates about fair value accounting and the expensing of employee stock options to disentangle the role of ideology from special interest pressure. In both debates, ideology explains politicians' involvement at exactly those points when the debate focuses on the economic consequences of accounting regulation (i.e., bank bailouts and top management compensation). Once the debates focus on more technical issues, connections to special interests remain the dominant force. [ABSTRACT FROM AUTHOR]

This study examines whether there is a difference in the degree of accounting conservatism between firms that voluntarily adopt International Financial Reporting Standards (IFRS) and those that use local accounting standards in Japan, being a traditional code-law country that is undergoing changes in its governance system. The difference-in-difference approach reveals that the degree of conditional conservatism decreases for IFRS adopters and more sharply for Japanese accounting standards' users between 2009/2010 and 2018/2019, resulting in relatively larger conditional conservatism for IFRS adopters. The regression analysis shows that the change in conditional conservatism is positively associated with IFRS adopters having a high foreign shareholders ratio. This study makes several contributions to the related literature. First, to the best of our knowledge, this study is the first to provide a comparative analysis of IFRS and Japanese accounting standards with respect to conservatism. Second, additional evidence is provided on the relationship between conservatism and corporate governance. [ABSTRACT FROM AUTHOR]

The European Commission has been setting the course for an EU-wide reform of the traditional corporate tax system of separate accounting (SA) to a unitary taxation with formula apportionment (FA). The underlying claim of this formula is that it allocates profits more precisely than SA to the country where the value is created, as SA can be distorted by intra-group profit shifting. We analyze and evaluate the proposed CCCTB apportionment formula in terms of how well FA approximates the "undistorted" profit. After identifying potential determinants of misapportionment in the CCCTB formula, we test the formula empirically by randomly grouping pairs of European groups to fictitious metagroups. We allocate profits to the metagroup members according to the formula and compare the apportioned FA profit with the observed SA profit (our proxy for "undistorted" profit). We find huge profit misallocations under FA. Restricting the sample to metagroup years with positive profit of each metagroup member, the mean negative (positive) profit deviation is − 4.2% (6.2%) of total assets. Compared to the mean return on assets of the sample, this results in an average error of − 49.5% or + 74.1%, respectively. The deviation caused by FA is systematic. The main drivers for profit misallocations are the profitability of a firm as well as the within-group heterogeneity in firm size and in profitability. The inclusion of loss years shows that loss firms would suffer from considerable additional tax payments under FA. An adjustment of the apportionment weights would slightly increase the performance of the formula. All in all, the CCCTB apportionment formula performs remarkably badly. [ABSTRACT FROM AUTHOR]

We examine whether, and how, shareholders' votes in the Say‐on‐Pay (SOP) are affected by the readability of the Compensation Discussion and Analysis (CD&A). Despite the SEC's Plain English requirement, qualitative disclosures on executive remuneration are generally long and complex. Extant evidence on whether low readability results in higher or lower shareholder dissent in the SOP, however, is ambiguous. We resolve this debate by demonstrating that the effects of readability on SOP voting are heterogeneous; while obfuscation may reduce dissent when CEO compensation is close to "normal" levels, diminished readability results in increased scepticism when pay levels are clearly excessive. The moderating role of readability is most pronounced for firms with less sophisticated shareholders, consistent with readability acting as a heuristic cue. Our results are robust to propensity score matching, and are less pronounced (1) when shareholders have less time to review the CD&A, and (2) when shareholders are distracted by competing AGMs, suggesting they are driven by readability, directly. Overall, our results highlight that greater use of Plain English in remuneration disclosures can have a substantial persuasive impact on shareholders. [ABSTRACT FROM AUTHOR]

Using firm‐level data for 1,084 parent firms in 24 countries and for 9,497 subsidiaries in 54 countries, we show that tax‐motivated profit shifting is larger among subsidiaries in countries that have stable corporate tax rates over time. Our findings further suggest that firms move away from transfer pricing and toward intragroup debt shifting that has lower adjustment costs. Our results are robust to several identification methods and respecifications, and they highlight the important role of tax‐rate uncertainty in the profit‐shifting decision while pointing to an adjustment away from more costly transfer pricing and toward debt shifting. [ABSTRACT FROM AUTHOR]

This article develops an agent-based model of security market pricing process, capable to capture main stylised facts. It features collective market pricing mechanisms based upon evolving heterogenous expectations that incorporate signals of security issuer fundamental performance over time. Distinctive signaling sources on this performance correspond to institutional mechanisms of information diffusion. These sources differ by duration effect (temporary, persistent, and permanent), confidence, and diffusion degree among investors over space and time. Under full and immediate diffusion and balanced reaction by all the investors, the value content of these sources is expected to be consistently and timely integrated by the market price process, implying efficient pricing. By relaxing these quite heroic conditions, we assess the impact of distinctive information sources over market price dynamics, through financial systemic properties such as market price volatility, exuberance and errancy, as well as market liquidity. Our simulation analysis shows that transient information shocks can have permanent effects through mismatching reactions and self-reinforcing feedbacks, involving mispricing in both value and timing relative to the efficient market price series. This mispricing depends on both the information diffusion process and the ongoing information confidence mood among investors over space and time. We illustrate our results through paradigmatic cases of stochastic news, before generalising them to autocorrelated news. Our results are further corroborated by robustness checks over the parameter space and across several market trading mechanisms. [ABSTRACT FROM AUTHOR]

Analysing 20 interviews with CFOs of German non-listed family firms, I report how the firms' financial reporting is organised, who are the financial statement addressees, how the CFOs define accounting quality, whether they manage earnings, and how owner families influence reporting. I also discuss the firms' costs of reporting and disclosure. Most CFOs see the requirement to disclose financial statements as a burden. They react by disclosing statements as late as possible and by providing only the minimum content necessary. As regards accounting quality, the CFOs value formal correctness, but also sustainability, persistence, and conservative estimation of net income. Most CFOs engage in earnings management, above all to achieve a positive trend in net income, in some cases also to comply with debt covenants. The influence of the owner families differs; however, in most cases the family at least "sets the tone" for the reporting. On average, the direct costs of accounting and auditing in my sample firms amount to about 1% of revenues. According to the CFOs, public disclosure does not result in material indirect costs, and most CFOs would not change much if the requirements for reporting and disclosure were abolished. These findings add to our understanding of private firm financial reporting and suggest several directions for future research. [ABSTRACT FROM AUTHOR]

In order to address the concern about whether the Public Company Accounting Oversight Board's recent requirement to disclose an EP's name in the United States (US) may cause unwanted consequences such as an increase in real earnings management (EM), I investigate the effect of requiring an engagement partner (EP) to sign audit reports on real and accrual-based earnings management in the United Kingdom, a comparable test environment. I measure accrual-based earnings management as the signed abnormal discretionary accruals and real earnings management as abnormally low levels of operating cash flows and discretionary expenses, as well as abnormally excessive production. I do not find a significant change in the usage of accrual-based and/or real earnings management for firm-years suspected of beating/meeting the zero, last-year, or analyst forecast consensus earnings threshold from the pre- to post-signature period. The results are robust to alternative proxies for EM and the control sample approach. My results mitigate the concern that managers may resort to more economically costly real earnings management following the mandatory disclosure of an EP's name in the US. [ABSTRACT FROM AUTHOR]

We examine the effectiveness of additional audit effort in lowering the risk of financial misstatements for companies with internal control material weaknesses during three separate post-SOX time periods. Our findings suggest that additional audit effort (as proxied by abnormal audit fees) is effective in lowering the risk of financial misstatements for clients with weak internal controls during the Auditing Standard No. 2 regime (2004–2006), but not during the extant Auditing Standard No. 5 (AS5) regime or the earlier 2002–2004 pre-404 audit (but still post-SOX) time period. We contribute to the on-going debate about the potential benefits associated with the SOX 404 audit and, in particular, the emerging literature on the effectiveness, or lack thereof, of the SOX 404 audit in improving the assessment of control risk under the extant AS5 regime (Schroeder and Shepardson in Account Rev 91(5):1513–1541, 2016). Collectively, our findings are consistent with the notion that extant PCAOB concerns about internal control quality under AS5 may be valid. [ABSTRACT FROM AUTHOR]

This study generates new empirical evidence on the issue of underreporting of executive stock options. It is the first under the mandatory expense setting of International Financial Reporting Standard (IFRS) 2 and to include performance-vested options. I use a hand-collected data sample from Germany, where performance vesting has a longer history than in other countries. I find that many firms fail to disclose all required parameters and underreport the values of the options. Besides inexperience with preparing IFRS reports, incentives to hide higher pay are associated with this reporting behavior. Additionally, firms with more complex options underreport more. Since the German setting shares many institutional similarities with other (European) IFRS countries, the results are of interest to shareholders, standard setters, and enforcement authorities in such countries. [ABSTRACT FROM AUTHOR]

While tax burden is always one of the primary concerns for corporate management and finance, it is questionable whether tax has always been among the core factors of corporate governance. This study aims to explore the effect of corporate governance on tax planning during the adverse circumstances created by the economic crisis. The effective tax rates of a sample of 55 non-financial companies listed on the Athens stock exchange (ASE) during the 2011–2015 period were used as a proxy of tax planning and were regressed on corporate governance characteristics, controlling for firm specific attributes. Results showed a significant positive association of board independence with tax planning and a significant negative association with chief executive officer (CEO) duality and firm size. The remaining corporate governance and firm variables which included board size, audit firm size, ownership concentration, leverage and liquidity were not found to exert a significant influence on corporate tax planning of listed companies in Greece. Our results shed light on the relationship of governance with corporate tax planning in periods of financial distress, and may be of particular interest for market participants, investors, tax authorities and policy makers in their efforts to improve the efficiency of the tax system and public revenue. [ABSTRACT FROM AUTHOR]

We examine whether managers appear to aggregate bias in multiple subjective accrual estimates to meet or just beat analyst expectations. We also consider whether the updated language in recent PCAOB auditing standards, focusing auditors on the potential for bias across multiple estimates, impacted this method of managing earnings. Using hand-collected data from a sample of manufacturers, we find that meeting or just beating the most recent consensus analyst earnings forecast is positively associated with income-increasing bias aggregated from multiple accounting estimates. We also find that this relation attenuates in the years following the issuance of PCAOB auditing standards. Further analyses reveal that, after these standards were released, firms increased the use of income-increasing, unexpected non-GAAP exclusions to meet or just beat expectations, an alternative technique subject to less auditor scrutiny. [ABSTRACT FROM AUTHOR]

We document that the initiation of audit committee interlocks is associated with contagion in reported special items. We argue that this is, in part, attributable to contagion of accounting policy choices. We find that the special items of newly interlocked firms, unrelated before interlock, become positively correlated afterward, suggesting information transfer starts with interlock formation. This result holds for negative special items, key components of special items (asset impairments, restructuring costs, and gains/losses from asset sales), and is stronger for larger firms and for firms within the same industry. [ABSTRACT FROM AUTHOR]

Rent seeking within the vast informal segment of the developing world is a relatively under‐explored topic in the interface of labor market policies and public economics. Moreover, how rent seeking and corruption within the informal segment gets affected by economic reforms targeted for the formal sector is rarely discussed in the literature. This paper fills the gap. We identify conditions under which economic reform in the formal segment will increase the rate of corruption or rent seeking in the informal sector and raise the pay‐off for those involved in rent‐seeking activities. When the formal sector contracts due to reforms, rent seeking in the informal sector may increase and lower the level of welfare unconditionally. Economic reforms may increase corruption instead of reducing it, unlike standard conjectures. [ABSTRACT FROM AUTHOR]

We use a machine learning technique to assess whether the thematic content of financial statement disclosures (labeled topic) is incrementally informative in predicting intentional misreporting. Using a Bayesian topic modeling algorithm, we determine and empirically quantify the topic content of a large collection of 10‐K narratives spanning 1994 to 2012. We find that the algorithm produces a valid set of semantically meaningful topics that predict financial misreporting, based on samples of Securities and Exchange Commission (SEC) enforcement actions (Accounting and Auditing Enforcement Releases [AAERs]) and irregularities identified from financial restatements and 10‐K filing amendments. Our out‐of‐sample tests indicate that topic significantly improves the detection of financial misreporting by as much as 59% when added to models based on commonly used financial and textual style variables. Furthermore, models that incorporate topic significantly outperform traditional models when detecting serious revenue recognition and core expense errors. Taken together, our results suggest that the topics discussed in annual report filings and the attention devoted to each topic are useful signals in detecting financial misreporting. [ABSTRACT FROM AUTHOR]

We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax‐haven countries after FATCA implementation, consistent with a decrease in "round‐tripping" investments attributable to U.S. investors' offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post‐FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature and policy analysis on regulation, tax evasion, and crime. [ABSTRACT FROM AUTHOR]

With the UK Directors' Remuneration Act and the US Dodd-Frank Act, a decent amount of research has examined so-called Say-on-Pay votes in countries where they are legally mandatory. In contrast, little is known about countries such as Germany or Canada, both of which operate in a voluntary Say-on-Pay (SOP) system. In a voluntary SOP system, the firms' managers can decide whether to sponsor a vote or not, and it is unclear how this decision and the subsequent voting dissent is influenced by firm performance. To reduce this research gap, this paper analysed a hand-collected sample from Germany covering 1746 annual general meetings that took place between 2010 and 2016. The results indicate that voting likelihood is positively associated with the relative market valuation of the firm (Tobin's Q) as long as the firm meets or beats analyst earnings forecasts and is negatively associated with free cash flow when the firm fails to meet forecasts. Only large companies with dispersed ownership grant a vote when they do not meet or beat the forecasts. Once the vote has been cast, voting dissent is lower for firms that meet/beat their forecasts and have high free cash flows or high market valuations. However, shareholders do not reward high CSR-performance with less voting dissent. Overall, the results emphasise the importance of financial performance for SOP voting likelihood and voting dissent. [ABSTRACT FROM AUTHOR]

We employ the European Central Bank's Loan-level Reporting Initiative as a shock to banks' asset disclosures. We find that after the disclosure regulation, treatment banks raise more capital at cheaper rates and increase lending. Using novel survey data on small businesses, we also document that, in regimes with heightened bank disclosures, borrowers receive greater funding, conditional on their demand for credit. Furthermore, companies whose relationship banks provide asset disclosures start to borrow and invest more relative to firms from the same country and industry. Collectively, our inferences suggest that asset disclosures alleviate the capital market frictions that banks face and allow them to supply more credit to the real economy. [ABSTRACT FROM AUTHOR]

An emerging literature shows that shareholders benefit from the Securities and Exchange Commission's (SEC) filing reviews in terms of improved disclosures and reduced information asymmetry. However, these reviews also impose significant costs on companies because comment letter remediation diverts time and resources away from normal operations and may result in restated or amended filings. Applying processing fluency theory, we examine whether the readability of the company's initial response to an SEC comment letter is associated with the likelihood of unfavorable outcomes from the review. We find that less readable company responses are associated with longer SEC response times and a greater likelihood that the company restates or amends a reviewed filing. Because the company response is preceded by a specific request for information from the SEC (i.e., a prompt), our setting allows for an improved ability to disentangle the effects of disclosure readability from the effects of disclosure content. [ABSTRACT FROM AUTHOR]

Much of the management compensation literature focuses either on the level and structure of executives' pay or the pay-for-performance sensitivity in a set of corporate governance structure in the Western economies. In this study, we examine the interactive effect of executive compensation, firm performance and corporate governance in different institutional and governance settings of an emerging market economy. Capturing monitoring and incentive alignment aspects as suggested in agency theory, we argue that in a markedly different executive compensation system in Thailand, the interrelationships between executive compensation, firm performance and corporate governance would exhibit some similarities to those found in developed economies. While there remains sparse research on how these relationships operate in Thailand, using data for 432 publicly listed Thai firms between 2000 and 2011, we find evidence of a reciprocal positive significant relationship between compensation and performance, as well as between corporate governance and performance. However, a reciprocal relationship is not found between corporate governance and compensation, which shows a mono-directional positive significant relationship running from corporate governance to compensation. These findings show similarities with those of developed economies and provide support for the need for an effective governance system to determine optimal executive compensation that will enhance firm performance and value. Our findings thus add some potentially noteworthy dimensions to the compensation literature that are especially important to policy makers and other stakeholders, and aiming to shape an optimal governance system in the emerging markets around the world. [ABSTRACT FROM AUTHOR]

We study how the interplay of disclosure and regulation shapes capital allocation in reward crowdfunding. Using data from Kickstarter, the largest online reward crowdfunding platform, we show that, even in the absence of clear regulation and enforcement mechanisms, disclosure helps entrepreneurs access capital for their projects and bolsters engagement with potential project backers, consistent with the notion that disclosure mitigates moral hazard. We further document that, subsequent to a change in Kickstarter's terms of use that increases the threat of consumer litigation, the association between project funding and disclosure becomes stronger. This evidence suggests that consumer protection regulation enhances the perceived credibility of disclosure. We find the effect of the change in terms of use to be more pronounced in states with stricter consumer protection regulations. Taken together, our findings yield important insights on the role of disclosure, as well as on the potential effects of increased regulation on crowdfunding platforms. [ABSTRACT FROM AUTHOR]

We analyze data made available through the PCAOB (Public Company Accounting Oversight Board) to provide descriptive evidence on the properties of auditors' actual quantitative materiality judgments and the implications of those judgments for financial reporting. Auditors' quantitative materiality judgments do not appear to result simply from applying conventional rules of thumb (e.g., 5% of pretax income), but instead are associated with size‐related financial statement outcomes (income, revenues, and assets), where the relative importance of the size‐related outcomes varies with client characteristics such as financial performance. Using the distribution of actual materiality amounts reported by auditors to the PCAOB as part of the audit‐inspection process, we construct a materiality‐judgment measure that locates a specific materiality amount within a normal range that is both comparable across varying client characteristics and supported by guidance in audit firm internal policy manuals. We find that looser materiality (an amount closer to the high end of a normal materiality range) is associated with fewer audit hours and lower audit fees, supporting the construct validity of this measure. We also find that looser materiality is associated with lower amounts of proposed audit adjustments and, in extreme cases, with a greater incidence of restatements, highlighting the importance of auditor materiality assessments for financial reporting reliability. [ABSTRACT FROM AUTHOR]