Summary
In the days, weeks, and months following the BP oil spill in the Gulf of Mexico, many of you watched powerlessly, wondering what you could do to help. As accountants, your ability to assist may not seem obvious, because your professional skills are centered on numbers and equations, rather than chemical containment and blowout prevention. There are, however, two branches of academic research that may arm auditors with the ability to make a difference, environmentally speaking. This article outlines the political cost hypothesis from the economic literature, as well as findings regarding the relationship between auditor corrections and discretionary accruals. Taken together, these two branches of research suggest the following: in the wake of an environmental disaster in a certain industry, other entities in that same industry may reduce earnings, to avoid potential political and regulatory costs and auditors are less inclined to correct discretionary reductions to income than discretionary increases.
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Extract
Environmental Disasters
In the days, weeks, and months following the BP oil spill in the Gulf of Mexico, many of us watched powerlessly, wondering what we could do to help. As accountants, our ability to assist may not seem obvious, because our professional skills are centered on numbers and equations, rather than chemical containment and blowout prevention.
There are, however, two branches of academic research that may arm auditors with the ability to make a difference, environmentally speaking. This article outlines the political cost hypothesis from the economic literature, as well as findings regarding the relationship between auditor corrections and discretionary accruals. Taken together, these two branches of research suggest the following: 1) in the wake of an environmental disaster ...See the full content of this document
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