Research
My research interests include corporate disclosure and auditing, with a particular focus on their economic consequences. My current agenda examines on how corporate reporting and auditing navigate untraditional and emerging issues related to technology and regulatory development to meet public demand for high-quality information. To support that, I apply cutting-edge data science techniques, such as machine learning and generative AI, to explore novel databases and quantify new research concepts.
Does Auditor Communication Matter? The Role of Knowledge Compatibility
(with Beatriz García Osma and Jun Nguyen*)
(*co-corresponding author)
Auditors need to keep a high profile as thought leaders due to the knowledge-intensive and credence nature of the audit. However, little is known about how auditors signal their expertise to market targets beyond what can be inferred by their past experience (e.g., industry portfolio). To study the relationship between auditor communication strategy and audit market dynamics and audit quality, I introduce the concept of knowledge compatibility, which is the alignment between the knowledge auditors offer and that clients demand. I quantify it by the similarity between audit firm podcasts and client forward-looking disclosure. I hypothesize and find that knowledge compatibility is positively associated with (i) audit fees, (ii) the likelihood of new auditor appointments, and (iii) accounting quality. I also provide evidence on the credibility of communication and actual knowledge development by hiring activities. These findings highlight the importance of auditor communication and the role of knowledge compatibility to address the idiosyncratic needs of audit clients.
Audit in the Dark: Auditor Responses to Risk in the Absence of Authoritative Guidance
(with Beatriz García Osma, Jun Nguyen*, and W. Robert Knechel)
(*co-corresponding author)
We explore how auditors address risk in the absence of authoritative accounting and auditing guidance. In an ever-evolving technological landscape, auditors are confronted with challenges transcending traditional organizational boundaries, often lacking knowledge about potential risks in an uncertain environment. In particular, we focus on the uncertain environment surrounding the cryptocurrency ecosystem, and construct and validate a text-based measure of the level and nature of client-level exposure to cryptocurrency risks. We find that an audit firm’s timely internal guidance when authoritative guidance is lacking significantly impacts auditor behavior, resulting in increased audit fees and CAM disclosures and a reduction in going concern opinions for clients with cryptocurrency exposure. The issuance of SEC’s Staff Accounting Bulletin No.121 facilitated the clarification of formal firm policies but does not fully eliminate the increase that follows the issuance of internal audit firm guidance. We also document increased hiring of crypto specialists at the office level. Overall, our study contributes by providing evidence of mechanisms through which auditors proactively address technological developments and new sources of uncertainty and risk.
Cybersecurity Commitment
(with Encarna Guillamon Saorin)
(corresponding author)
We propose a concept of the firm proactive strategy in reporting and addressing cybersecurity risks as cybersecurity commitment. We then quantify cybersecurity commitment from the Management Discussion and Analysis (MD&A) section of 10-K filings and examine its relations with economic consequences and market valuation. We also decompose the nature of commitment by detecting five main topics: corporate governance, physical and financial resources, technology, policy, and stakeholder engagement. Our results indicate that companies showing cybersecurity commitment are less likely to experience data breaches, and this protective effect is particularly strong in companies with greater breach risks. Firms with higher levels of cybersecurity commitment will get more favorable operating debt covenants. High-risk but non-breached firms benefit from showing a strong cybersecurity commitment, which lessens market negative spillover during breach events in the industry. Overall, our results suggest that cybersecurity commitment helps firms to lessen breaches and is valued positively by capital providers.