Do Auditors Benefit from Clients’ Financial Statement Comparability?
Posted: 3 Jan 2018
Date Written: December 29, 2017
We hypothesize that firm’s financial statement comparability (hereafter FSC) has two effects on audit engagement. First, it reduces auditors’ information acquisition cost thereafter reduces audit work. Second, FSC may have a deterrent effect on managers’ misreporting behavior and can reduce risks faced by auditors. We find consistent evidence to support our hypotheses that FSC reduces both audit fees and audit reporting lags. Furthermore, we show that out results are robust to a battery of additional tests (firm fixed effects, 2SLS regression, propensity score matching and change models) that address endogeneity problems. In addition, we also show that our results are more pronounced for firms with higher information asymmetry and firms with weaker corporate governance, providing support to our hypothesized channels. We further show that FSC are more useful for Big 4 audit firms or audit firms which are industry experts. We contribute to the earnings comparability literature by providing further evidence on the benefits of FSC on the third party.
Keywords: Audit Fees, Audit Reporting Lag, Financial Statement Comparability
JEL Classification: M41, M42
Suggested Citation: Suggested Citation