Auditors as a Vector for Diffusing Forecasting Knowledge

Abstract

We explore auditors’ role in diffusing knowledge about forecasting among their clients. While management forecasts are not audited, prior research suggests that auditors affect management forecasting by serving a governance role that improves companies’ internal information environments and the credibility of managerial forecasts. We hypothesize that auditors influence managerial forecasting beyond the governance role by diffusing forecasting process knowledge and best practices across clients. We find that companies whose auditors have greater forecasting knowledge exposure forecast more accurately. However, auditor forecasting knowledge exposure is not associated with audit quality or auditor independence, consistent with auditors affecting management forecasting in a novel manner. Our results persist through a variety of robustness tests, including an extra-industry instrumental variable regression. Our research indicates a novel source of valuable knowledge auditors provide to clients and suggests that auditors improve their clients’ unaudited information environment by sharing knowledge across clients.