Financial Statement Footnote Readability and Corporate Audit Outcomes

Posted: 8 Sep 2018

See all articles by John L. Abernathy

John L. Abernathy

Kennesaw State University

Feng Guo

Iowa State University - Department of Accounting and Finance

Thomas R. Kubick

University of Nebraska-Lincoln

Adi Masli

University of Kansas - School of Business

Date Written: August 27, 2018

Abstract

We examine whether the readability of financial statement footnotes in the annual report is informative about audit engagement risk. Using various readability measures, we predict and find that firms with less readable footnotes have longer audit report lag, incur higher audit fees, and are more likely to receive a first time modified going concern opinion. We also show that readability of footnotes is associated with a higher likelihood of financial misstatements and future accounting-related litigation. Our results are robust to several measures of readability used in prior literature, as well as different specifications and design choices, revealing that financial statement footnote readability provides incremental information about audit engagement risk that affects auditor-client contracting.

Suggested Citation

Abernathy, John L. and Guo, Feng and Kubick, Thomas R. and Masli, Adi, Financial Statement Footnote Readability and Corporate Audit Outcomes (August 27, 2018). Auditing: A Journal of Practice & Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3239625

John L. Abernathy (Contact Author)

Kennesaw State University ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Thomas R. Kubick

University of Nebraska-Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Adi Masli

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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