Expanded Auditor’s Report Disclosures and Loan Contracting

Posted: 23 May 2021

See all articles by Vlad-Andrei Porumb

Vlad-Andrei Porumb

University of Groningen - Faculty of Economics and Business

Yasemin Zengin-Karaibrahimoglu

University of Groningen

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Reggy Hooghiemstra

University of Groningen - Faculty of Economics and Business

Dick De Waard

University of Groningen

Multiple version iconThere are 2 versions of this paper

Date Written: May 13, 2021

Abstract

Starting in October 2013, auditors of premium-listed firms in the United Kingdom are mandated to prepare an expanded auditor’s report that provides details on audit procedures, risks of material misstatement (RMMs), and materiality thresholds. This regulatory change is important to study, because it aims to increase the informational value of the traditional, highly standardized, pass-or-fail auditor’s report. We examine whether the disclosures in the expanded auditor’s report provide information that is relevant for adopting firms’ loan contracting terms in the post-adoption period. Our results indicate that the introduction of the expanded auditor’s report is associated with reduced loan spread and longer maturity for loan facilities of adopting firms relative to non-adopting UK firms. When we focus on adopting firms in the post-adoption period, we find that the number of “unique RMMs” mentioned in the auditor’s report, but not in the audit committee report, are positively associated with loan spread but are not associated either with loan maturity or the number of lenders in the loan syndicate. Additional tests show that the benefits, in terms of a reduced spread, of having a lower number of “unique RMMs” accrue mostly to adopters with a poor information environment. Taken together, our results provide preliminary evidence that the expanded auditor’s report disclosures contain relevant information for loan contracting in the United Kingdom. This study highlights the unique role of the expanded auditor’s report in providing information relevant to lenders and supports standard setters’ efforts to enrich its informational content.

Keywords: expanded auditor’s report, audit risk disclosures, risks of material misstatement (RMMs), loan contracting terms

JEL Classification: G20, G21, G32, K22, M42

Suggested Citation

Porumb, Vlad-Andrei and Zengin-Karaibrahimoglu, Yasemin and Lobo, Gerald J. and Hooghiemstra, Reggy and De Waard, Dick, Expanded Auditor’s Report Disclosures and Loan Contracting (May 13, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3849529

Vlad-Andrei Porumb (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Yasemin Zengin-Karaibrahimoglu

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Reggy Hooghiemstra

University of Groningen - Faculty of Economics and Business ( email )

Department of Auditing
P.O. Box 800
9700 AH Groningen
Netherlands
31 50 363 3768 (Phone)
31 50 363 7174 (Fax)

Dick De Waard

University of Groningen ( email )

Postbus 72
9700 AB Groningen
Netherlands

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