Earnings Forecast Bias And Auditor Risk Response Under Different Forecasting Strategies

The earnings forecast system is one of the important systems in China’s capital market.It requires listed companies to forecast and disclose the earnings information before the regular report is released,so it can meet the investor’s requirements for information timeliness,which is of great significance for the ease of information asymmetry and the protection of investor rights,especially the small and medium investors.However,in the practice,the earnings forecasts of many companies are not accurate,which is quite different from real earnings.Many companies play face-changing after the release of earnings forecasts and frequently amend their earnings forecast announcements,which is greatly harmful for the order of the capital market and contrary to the original intention of establishing this system.This phenomenon has also attracted the attention of the academic community.Many scholars have studied the reaction of investors,analysts and regulatory authorities to the earnings forecast deviation,but as the “economic police”,whether the auditor will use the earnings forecast information to assess the audit risk and whether companies with earnings forecast deviation will be responded more strictly,these topics are few involved in today’s literature,the related researches are not deep enough,which can be studied further.Although the deviations of earnings forecasts extensively exist in listed companies,the effect on the auditor’s risk response is different due to the different forecasting strategies selected by managers.Specifically,the earnings forecast deviation can be divided into positive deviation and negative deviation.The positive deviation indicates that the forecast earning is greater than the real earning,we call it optimistic forecast,and otherwise we call it conservative forecast.These reflect the manager’s different forecast attitudes.Also,the earnings forecast can be divided into voluntary disclosure,which is the voluntary behavior of managers for some purpose,and mandatory disclosure,which is the passive behavior due to the regulatory requirements.Apparently,these different forecasting strategies contain different information.How will the auditors view these different forecasting strategies,and whether the auditors’ reaction to companies’ forecasting bias will be different because of different forecasting strategies,there is currently no corresponding research on it.Based on above situation,our paper uses the 2009-2017 A-share listed companies as a research sample to conduct an empirical test,trying to answer the following two questions: First,whether the earnings forecast bias will cause the auditor’s concern and second,whether the different forecasting strategies adopted by managers can affect the auditor’s reaction to earnings forecast bias.The results of this paper show that the earnings forecast bias is positively correlated with the auditor’s risk response.The greater the deviation of the earnings forecast is,the stricter risk response measures will be taken by auditors,which mainly reflect in higher audit fees and higher probability to receive modified audit opinions.This indicates that the company’s earnings forecast bias will become the basis of auditor’s risk assessment.Further,our paper finds that the forecasting strategy will affect the auditor’s response to the earnings forecast bias.Specifically,compared with the optimistic forecast,the conservative forecast will alleviate the impact of the forecast bias on the auditor’s risk response,which indicates that the auditor prefers manager’s conservative forecasting strategy.With the distinguish between voluntary disclosure and mandatory disclosure,we find that voluntary disclosure can further alleviate the impact of earnings forecast bias on auditors’ risk response in case of the conservative forecast.In further analysis,we examine whether the voluntary disclosure can still play an active role under optimistic forecast.We find that voluntary disclosure will strengthen the impact of earnings forecast bias on the auditor’s risk response in the case of optimistic forecast,which indicates that different forecast attitudes mean different risk information and the auditor will consider the forecast strategy comprehensively.This paper also divides the earnings forecast into good news and bad news according to the different type,so as to examine the impact of different types of earnings forecast bias on auditor risk response.We find that good news will strengthen the auditor’s response to earnings forecast bias.Finally,this paper presents suggestions from the aspects of companies,investors and regulatory authorities to provide some reference for corporate decision-making and policy formulation.The structure of the full text mainly includes the introduction,the main chapters and the conclusion part.The introduction mainly introduces the research background,research significance and research methods;chapter 1 of the main chapters is the literature review,this part systematically reviews the relevant research on earnings forecast and the relevant literature on the audit risk factors;chapter 2 is the theoretical analysis and research hypothesis;chapter 3 is the research design,which introduces the measurement of variables,the setting of the model and the selection of samples;chapter 4 is the empirical analysis,which shows regression results of each hypothesis,the robust test results and the further analyst result;the last part is the conclusion,including the research conclusions of this paper and the corresponding policy recommendations.