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

Posted: 13 May 2021

See all articles by Elizabeth F. Gutierrez

Elizabeth F. Gutierrez

Universidad de Chile

Adriana Korczak

University of Bristol - School of Economics, Finance and Management

Maria Vulcheva

Florida International University

Date Written: May 12, 2021

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

Suggested Citation

Gutierrez, Elizabeth F. and Korczak, Adriana and Vulcheva, Maria, Do Insiders Use Audit Findings? Evidence from the Expanded Audit Report in the United Kingdom (May 12, 2021). Available at SSRN: https://ssrn.com/abstract=3844689

Elizabeth F. Gutierrez (Contact Author)

Universidad de Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

Adriana Korczak

University of Bristol - School of Economics, Finance and Management ( email )

8 Woodland Road
Bristol, BS8 1TN
United Kingdom
+441173941490 (Phone)

Maria Vulcheva

Florida International University ( email )

11200 SW 8 Street RB244B
Miami, FL 33199
United States

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