Does auditing reduce bias in financial reporting? A review of audit-related adjustment studies

Questions relating to whether audit adjustments reduce bias in financial reporting are addressed by an analysis of 9 data sets of audit-related adjustments from more than 1500 audits across 16 audit years. Summary statistics are tabulated by direction of effect on earnings, by selected accounts, and by magnitude. Overall, audit-related adjustments show an overwhelmingly negative effect on preaudit net earnings and net assets. The average aggregate adjustment reduces earnings and assets by 2 times-8 times the minimum amount that would materially misstate the financial statements. Thus, the year-end audit is seen as directly reducing positive bias in preaudit net earnings and net assets as well as improving the precision of measurement. This implies that, other things being equal, if auditing had not been applied, then the financial reports of these firms would have tended to show materially inflated earnings and assets.