TY - JOUR
T1 - Why are expanded audit reports not informative to investors? Evidence from the United Kingdom
AU - Lennox, Clive S.
AU - Schmidt, Jaime J.
AU - Thompson, Anne M.
N1 - Funding Information:
We thank Mark DeFond, Jere Francis, Chris Hogan, Bill Kinney, Jeff Pittman, Joe Schroeder (AAA discussant), Theodore Sougiannis, Mike Wilkins, and the workshop participants at Baylor University, the University of California at Riverside, the University of Illinois Urbana-Champaign, the 2016 AAA Auditing Midyear Conference, and the 2016 International Symposium on Audit Research for their helpful comments and suggestions. We are grateful for research funding from the McCombs Research Excellence Grant Program and the McCombs Undergraduate Research Assistant Program. We thank Emily Baker, Sid Chandrashekar, Diana Choi, Jessie Hu, Minjae Kim, John Menefee, Catherine Quintana, Stephen Tran, Jinghua Xing, Tingya Hu, Julia Rossdeutscher, Ting-Ting Wang, Samantha Wendt, and Qiang Wei for their research assistance.
Publisher Copyright:
© 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.
PY - 2023/6
Y1 - 2023/6
N2 - Standard-setters worldwide have passed new audit reporting requirements aimed at making audit reports more informative to investors. In the UK, the new standard expands the audit reporting model by requiring auditors to disclose the risks of material misstatement (RMMs) that had the greatest effect on the financial statement audit. Using short window tests, prior research indicates that these disclosures are not incrementally informative to investors (Gutierrez et al. in Review of Accounting Studies 23:1543–1587, 2018). In this study, we investigate three potential explanations for why investors do not find the additional auditor risk disclosures to be informative. First, using long-window tests, we find no evidence that the insignificant short-window market reactions are due to a delayed investor reaction to RMMs. Second, using value relevance tests, we show that the insignificant market reactions are not due to auditors disclosing irrelevant information. Finally, we provide evidence suggesting that RMMs lack information content because investors were already informed about the financial reporting risks before auditors began disclosing them in expanded audit reports.
AB - Standard-setters worldwide have passed new audit reporting requirements aimed at making audit reports more informative to investors. In the UK, the new standard expands the audit reporting model by requiring auditors to disclose the risks of material misstatement (RMMs) that had the greatest effect on the financial statement audit. Using short window tests, prior research indicates that these disclosures are not incrementally informative to investors (Gutierrez et al. in Review of Accounting Studies 23:1543–1587, 2018). In this study, we investigate three potential explanations for why investors do not find the additional auditor risk disclosures to be informative. First, using long-window tests, we find no evidence that the insignificant short-window market reactions are due to a delayed investor reaction to RMMs. Second, using value relevance tests, we show that the insignificant market reactions are not due to auditors disclosing irrelevant information. Finally, we provide evidence suggesting that RMMs lack information content because investors were already informed about the financial reporting risks before auditors began disclosing them in expanded audit reports.
KW - Audit reporting model
KW - Information content
KW - Value relevance
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U2 - 10.1007/s11142-021-09650-4
DO - 10.1007/s11142-021-09650-4
M3 - Article
AN - SCOPUS:85123203337
SN - 1380-6653
VL - 28
SP - 497
EP - 532
JO - Review of Accounting Studies
JF - Review of Accounting Studies
IS - 2
ER -