Do Insiders Use Audit Findings? Evidence from the Expanded Audit Report in the United Kingdom

Abstract

In this paper, we examine the association between the contents of the expanded audit report, which was adopted in 2013, and insider trading in the United Kingdom. Pre/post analyses indicate that following adoption of the expanded report, the likelihood and volume of insider trading in the period between an earnings announcement and publication of the audit report do not change. In cross-sectional tests of the post-adoption period only, we find that insiders trade based on auditors’ materiality disclosures both before and after the expanded report is published, but the association between insider trading and the number of risks of material misstatement is significant only in the period after the report’s publication. We attribute our findings to the availability and ease of interpretation of audit disclosures and insiders’ desire to minimize their legal and reputational risks. Our findings speak to the usefulness of the mandated information in the expanded audit report and the importance of timing for audit report publication.

Keywords: expanded audit report; insiders; materiality; risks of material misstatement

JEL Classification: M42, M48, G14