The Effects of Audit Quality Disclosure on Audit Effort and Investment Efficiency

60 Pages Posted: 15 Dec 2014 Last revised: 6 Feb 2018

See all articles by Qi Chen

Qi Chen

Duke University - Fuqua School of Business

Xu Jiang

Duke University

Yun Zhang

George Washington University

Date Written: February 4, 2018

Abstract

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

Chen, Qi and Jiang, Xu and Zhang, Yun, The Effects of Audit Quality Disclosure on Audit Effort and Investment Efficiency (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=2538076 or http://dx.doi.org/10.2139/ssrn.2538076

Qi Chen

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
(919) 660-7753 (Phone)

Xu Jiang (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Yun Zhang

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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