“Cash Flow Management, Financial Reporting Quality, and Auditor Responses” by Dr. Hong XIE
Dr. Hong XIE
Associate Professor, University of Kentucky
Visiting Associate Professor, City University of Hong Kong
Prior studies find that changes in noncash current assets and in current liabilities from comparative balance sheets often do not articulate with (i.e., are not equal to) their corresponding changes on the statement of cash flows. Labeling the difference between these two changes as non-articulation amounts (NARTAs), we examine the association of absolute NARTAs with accruals quality, misreporting, audit fees, and audit opinions, respectively. We find that absolute NARTAs are negatively associated with accruals quality and positively associated with misreporting. In addition, auditors are more likely to charge higher audit fees and to issue a modified or going-concern audit opinion to firms with larger absolute NARTAs. These findings are consistent with the view that larger absolute NARTAs indicate lower financial reporting quality and that auditors are aware of audit risk stemming from cash flow management by charging higher audit fees and/or issuing modified or going-concern audit opinions to firms with larger absolute NARTAs. They also further validate absolute NARTAs as a measure of cash flow quality (Gong et al. 2015).