Are Expanded Audit Reports Informative to Investors? Evidence from the U.K.
46 Pages Posted: 19 Jun 2015 Last revised: 14 Mar 2019
Date Written: March 12, 2019
In an effort to make audit reports more informative to investors, the U.K. recently passed a new audit reporting standard that requires auditors to disclose the risks of material misstatement (RMMs) that had the greatest effect on the financial statement audit. Using short-window market reactions to measure investors’ responses to the RMMs, our results indicate that investors do not find these disclosures incrementally informative. However, using long-window tests, our results indicate that the RMM disclosures reliably capture the uncertainty in accounting measurements. In additional analysis, we find the RMM disclosures lack incremental information content because most of the risks had already been disclosed by management in the prior earnings announcement, conference call, or the previous year’s annual report. Thus, investors were already informed about a majority of the risks before the risks were disclosed by auditors in the expanded audit reports.
Keywords: Audit reporting, Disclosure, Risks of material misstatement
JEL Classification: M41, M42, M48
Suggested Citation: Suggested Citation