Investors' Perceptions of Earnings Quality, Auditor Independence, and the Usefulness of Audited Financial Information

This paper investigates whether nonprofessional investors' beliefs mirror the SEC's concerns that earnings quality and auditor independence have declined over time. It also examines whether lower perceptions of earnings quality are associated with more or less reliance on a firm's audited financial statements and fundamental analysis of those statements when making investment decisions. Results suggest that the SEC's concerns are valid: Perceived earnings quality for all publicly traded firms has declined over time, as has perceived auditor independence and the perceived reliability of audited financial information. In contrast, the perceived relevance of audited financial information has increased. Lower perceptions of earnings quality are associated with greater reliance on a firm's audited financial statements and fundamental analysis of those statements when making investment decisions. This result suggests either lower perceptions of earnings quality lead investors to examine more thoroughly a firm's audited financial statements, or more thorough analysis of a firm's financial statements leads investors to lower their assessments of the firm's earnings quality.