Impact of Auditor and Audit Committee Report Changes on Audit Quality and Costs: Evidence from the United Kingdom
55 Pages Posted: 21 Aug 2015 Last revised: 29 Oct 2016
Date Written: October 12, 2016
While substantial revisions to auditor and audit committee reporting are being discussed internationally, including in the United States, the impact of these reforms on audit quality is unknown. We exploit the United Kingdom’s recent regulatory changes and find that the U.K.’s new reporting regime is associated with an improvement in audit quality as proxied by significant decreases in absolute abnormal accruals and the propensity to just meet or beat analyst forecasts. Moreover, we find a significant increase in earnings response coefficients, indicating a greater investor reaction to unexpected earnings after the new reports. While we find that audit fees marginally increased after the reporting changes, the increase is not significantly different from the fee change documented in the prior year, suggesting a possible time trend of increasing fees unrelated to the new requirements. We also fail to document a significant change in audit delay. Taken together, this study finds that new auditor and audit committee reporting requirements are associated with a significant improvement in audit quality without detecting significant incremental costs.
Keywords: audit report changes; audit committee report changes; PCAOB; SEC; United Kingdom; audit quality; audit costs
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