Is Expanded Auditor Reporting Meaningful? UK Evidence

Journal of International Accounting, Auditing and Taxation, Forthcoming

61 Pages Posted: 28 Dec 2022

See all articles by Mohamed Elsayed

Mohamed Elsayed

Queen's University Belfast - Queen's Management School

Tamer Elshandidy

Ajman University

Yousry Ahmed

University of Bristol; Zagazig University

Date Written: January 1, 2023

Abstract

In 2013, the Financial Reporting Council (FRC) in the UK mandated independent auditors to provide an expanded audit report to disclose the risks of material misstatement and application of materiality. This paper examines the information content and economic consequences of the expanded auditor’s report and offers three main results. We first investigate the usefulness of auditor reporting regime change and find evidence that the new reporting regime relatively influences market indicators. Second, we document that firms receiving an expanded audit report with a higher level of disclosure on risks of material misstatement (materiality) exhibit significantly higher (lower) idiosyncratic risk, beta, and cost of equity. That is, the expanded auditor’s disclosure meaningfully affects firms’ risk fundamentals. Third, we find that information conveyed by the expanded auditor’s report impacts bid-ask spread, trading volume, volatility of market returns, and analyst forecast dispersion. Collectively, our analyses suggest that auditors provide information that meaningfully reflects the risks that the audited companies face. Furthermore, this information is associated with significant economic consequences for capital market participants, implying that it is not generic. This firm-specific and useful disclosure supports the FRC (followed by International Auditing and Assurance Standard Board and Public Company Accounting Oversight Board) decision mandating the expanded audit report and provides evidence-based insights to major recent structural reforms aiming at proposing remedies to audit and capital market problems in the UK, and beyond.

Keywords: Expanded audit report; Key/Critical audit matters (KAMs/CAMs); Materiality; Cost of capital; Market liquidity; Risk; Textual analysis

JEL Classification: M41, M42, M48

Suggested Citation

Elsayed, Mohamed and Elshandidy, Tamer and Ahmed, Yousry, Is Expanded Auditor Reporting Meaningful? UK Evidence (January 1, 2023). Journal of International Accounting, Auditing and Taxation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4311575

Mohamed Elsayed (Contact Author)

Queen's University Belfast - Queen's Management School

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

Tamer Elshandidy

Ajman University ( email )

Al-Jurf
Ajman
United Arab Emirates
503758378 (Phone)
P.O.Pox 34 (Fax)

HOME PAGE: http://https://www.ajman.ac.ae/en

Yousry Ahmed

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, Avon BS8 ITH
United Kingdom

Zagazig University ( email )

Zagazig
Egypt

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
221
Abstract Views
1,207
Rank
283,857
PlumX Metrics