AUDITORS’ REPUTATIONAL SPILLOVER CONCERNS IN THE COMMUNICATION OF EARNINGS ANNOUNCEMENT REVISIONS

Abstract

Capital market participants rely heavily on preliminary earnings releases, but these releases sometimes contain inaccuracies that require subsequent correction. Managers can highlight the revisions using an 8-K or disclose them less prominently in a subsequent 10-K/Q. I investigate whether auditors influence this disclosure channel. Disclosing the revision in the 10-K/Q may be perceived as less transparent, creating reputational spillover concerns for auditors through their association with the client, even though auditors have no assurance responsibility for the accuracy of unaudited preliminary earnings releases. Consistent with this expectation, I find that companies audited by industry specialists are more likely to issue an 8‑K to highlight the revision, while companies that are economically more important to the audit office are less likely to issue an 8‑K. In addition, auditors’ influence is more pronounced when managers have greater incentives and ability to downplay revisions (i.e., when revisions affect earnings thresholds, analyst coverage is low, institutional ownership is low, or audit market concentration is low). Overall, the evidence suggests that auditors’ reputational spillover concerns extend beyond formal assurance responsibilities and improve disclosure transparency.