Auditor-provided nonpublic signals of misreporting and CFO dismissal

Phillip T. Lamoreaux, Summer Zhujun Liu, Nathan J. Newton, Min Zhang

Review of Accounting Studies · 2025 · Volume 31 · Issue 1

Abstract

Research suggests that board members value financial reporting quality because executive dismissal often follows low reporting quality events. However, inferences about the board’s demand for reporting quality in these studies are confounded by board members’ reputation incentives because the events examined are public (e.g., restatements). We investigate boards’ demand for reporting quality by exploiting aprivatesignal of misreporting: audit adjustments communicated to the Board by the external auditor. We first survey 29 audit committee chairs to understand whether boards use audit adjustments in their oversight of management and then conduct an empirical investigation to answer our research question. We find an increased likelihood of CFO dismissal following audit adjustments. This association is driven by adjustments that reduce income and by firms with better board oversight. These findings suggest that boards proactively use nonpublic signals of reporting quality and incorporate information from auditors into their monitoring function.

Keywords

Private signals, Audit adjustments, Reporting quality, Executive turnover, CFO dismissal

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