Accounting Professor Examines Supply Chain Auditors, Revenue Quality
August 22, 2018
BATON ROUGE – Is aggressive revenue management by a supplier greater when the supplier and their major customer engage the same office-level auditor and when the major customer makes significant purchases from the supplier? These questions are at the core of a study conducted by Professor Ken Reichelt, LSU Department of Accounting, and co-authors Hsihui Chang, Drexel University; Hsin-Chi Chen, Tunghai University and Jengfang Chen, Macquarie University.
“Do Supply Chain Auditors Compromise? Evidence from the Association of Aggressive Revenue Management and Major Customer Dependence,” was recently accepted for publication in the Journal of Accounting Auditing and Finance.
The study concludes that auditors of both the supplier of the major customer and the major customer, who are from the same audit office (supply chain auditors), are more likely to permit supplier clients to manage revenue aggressively when the major customer is economically dependent on the supplier.
Prior studies find that audit fees are lower for supply chain auditors, while other studies show that revenue manipulation is the most pervasive form of earnings manipulation. Prior studies do not show whether supply chain auditors are more accommodating to their supplier clients in aggressively managing revenue. The authors provide empirical evidence from 2,421 observations of firms that have abnormally high revenue over the period 2003-2012. They find that supply chain auditors are more likely to be associated with supplier clients who report abnormally high revenues when the major customers are more economically dependent on the supplier. The results are even stronger when there are interlocking directors, and when there is a significant influence of operating and financing activities between the supplier and the major customer. The study also finds that aggressive revenue management is less likely when supply chain auditors are industry specialists.
“The Journal of Accounting Auditing and Finance is a high-quality peer-reviewed journal in our field,” Reichelt said. “I am grateful for the support of the editor and am particularly thankful for the creativity, hard work and perseverance of my co-authors. The study should be of interest to auditors, accountants, and regulators in light of new revenue accounting standards that take effect in 2019.”
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Contact: Angela McBride