Nonprofessional Investors’ Reactions to the PCAOB's Proposed Changes to the Standard Audit Report

60 Pages Posted: 13 Mar 2017

See all articles by Brian Todd Carver

Brian Todd Carver

Clemson University - School of Accountancy & Legal Studies

Brad S. Trinkle

Mississippi State University - School of Accountancy

Date Written: March 9, 2017

Abstract

As part of its efforts to improve the informational value of the standard audit report, the Public Company Accounting Oversight Board (PCAOB) proposed a new auditing standard that would require the auditor to report critical audit matters (CAMs) in the body of the audit report. The proposal met with approval from investor groups, while preparers have suggested the new disclosures could negatively affect the quality of the audit and the informational content of the audit report. This study examines how the proposed standard influences experienced, nonprofessional investors’ perception of the readability of the audit report, their valuation judgments, and their evaluations of management’s credibility. We find that the disclosure of a CAM negatively impacts the readability of the audit report, but does not, either directly or through its effect on readability, incrementally inform investors’ valuation judgments. Instead, investors focused on earnings benchmark performance when making valuation judgements. The disclosure of a CAM does, however, lower investors’ perceptions of management’s credibility when earnings just meet expectations. Our results suggest that the PCAOB’s proposed standard will have a significant, negative effect on the readability of the audit report but only a limited impact on the informational content of the audit report for investors.

Keywords: Critical Audit Matters, Standard Audit Report, Investor’s Perception, Readability, Valuation Judgment

JEL Classification: C99, M42, M48

Suggested Citation

Carver, Brian Todd and Trinkle, Brad S., Nonprofessional Investors’ Reactions to the PCAOB's Proposed Changes to the Standard Audit Report (March 9, 2017). Available at SSRN: https://ssrn.com/abstract=2930375 or http://dx.doi.org/10.2139/ssrn.2930375

Brian Todd Carver (Contact Author)

Clemson University - School of Accountancy & Legal Studies ( email )

Clemson, SC 29634
United States

Brad S. Trinkle

Mississippi State University - School of Accountancy ( email )

Mississippi State, MS 39762
United States

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