The Effects of Audit Quality Disclosure on Audit Effort and Investment Efficiency
60 Pages Posted: 15 Dec 2014 Last revised: 6 Feb 2018
Date Written: February 4, 2018
We examine how disclosing information about audit quality affects auditors' effort and investors' investment efficiency. In our setting, the usefulness of audited financial reports for investors depends on both the quality of the underlying financial reporting (e.g., as embodied by GAAP) and the quality of auditors' reports (i.e., the likelihood with which audit evidence uncovers managerial misreporting). An auditor exerts an unobservable effort to influence audit quality and is motivated by liability in the event of audit failure. We show that audit quality disclosure increases auditors' effort incentives only when the underlying financial reporting quality is relatively weak. Our analyses contribute to the debate about the costs and benefits of policies aimed at improving audit transparency.
Keywords: auditing, disclosure, investment efficiency, financial reporting standard, auditing standard
Suggested Citation: Suggested Citation