What is the role of auditing in earnings announcement disclosures? the impact of audit completeness and quality on gaap disclosure details

This study examines the role of the external auditor in management's decision about the amount of GAAP financial statement information to disclose in the annual earnings announcement. The earnings announcement is a key disclosure provided by public companies, and the value relevance of the earnings announcement is increasing in the amount of GAAP financial statement information included in the release. Despite the importance of earnings announcements as an information source for investors, there is no requirement that earnings announcements contain audited earnings numbers; in fact, recent trends show that the majority of companies release earnings before the completion of year-end audit fieldwork. I predict that companies that wait until the audit is complete (or closer to completion) prior to the release of their earnings announcement and companies with higher quality audits will provide more detailed GAAP disclosures in their earnings announcements because management has more confidence in the financial reporting system and the underlying financial statement balances. In addition, management benefits from a reduced risk of litigation and reputation loss. Consistent with my predictions, I find that when the audit is closer to completion at the earnings announcement release date and is of higher quality, the earnings announcement disclosure contains more overall GAAP disclosures, driven primarily by more detailed balance sheet and cash flow statement disclosures. The results of this study contribute to the academic literature by providing evidence that auditing facilitates more detailed earnings announcement GAAP disclosures. Furthermore, this study makes a key contribution to a new stream of literature that examines the impact of audit completeness on management disclosure decisions. These results are also important to regulators because they suggest that the external audit function plays an important role in key financial statement disclosure decisions beyond the mandatory audited financial statements included in the 10-K filing.