Are Expanded Audit Reports Informative to Investors? Evidence from the U.K.

46 Pages Posted: 19 Jun 2015 Last revised: 14 Mar 2019

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Jaime J. Schmidt

University of Texas at Austin

Anne Thompson

University of Illinois at Urbana-Champaign

Date Written: March 12, 2019

Abstract

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

Lennox, Clive and Schmidt, Jaime J. and Thompson, Anne, Are Expanded Audit Reports Informative to Investors? Evidence from the U.K. (March 12, 2019). Available at SSRN: https://ssrn.com/abstract=2619785 or http://dx.doi.org/10.2139/ssrn.2619785

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Jaime J. Schmidt

University of Texas at Austin ( email )

Austin, TX 78712
United States

Anne Thompson

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

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