The Long Arm of the Media: Media’s Effect on Auditors and Financial Reporting Quality

Accounting

Further details

Abstract

We extend prior research by examining whether the media has a governance role for firms' financial reporting quality. In this setting, the media creates pressure for managers to both refrain from and engage in earning manipulation, suggesting that the media's governance role may be marginal. We posit that the media has a disciplining effect on financial reporting quality that operates through auditors as greater media visibility exposes auditors to more litigation and reputation risk if an audit failure were to occur. We first find that the client’s media coverage increases auditors’ litigation and reputation costs in the case of audit failure. Next, we find that audit fees are positively related to the client’s media coverage. In addition, we use a path analysis and find that media coverage alone does not have an impact on financial reporting quality, instead the positive association between media coverage and financial reporting quality is fully mediated by audit fees, and it becomes more pronounced when clients have more pressure to report better performance. Further tests using comparative statistics, instrumental variables, regression discontinuity, a quasi-natural experiment, a system generalized method of moments procedure, and a three-stage regression address endogeneity concerns and continue to support that media coverage creates incentives for auditors to improve financial reporting quality of their clients.