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Effects of Low-Quality Audit Disclosure on Audit Effort and Informativeness

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Title:Effects of Low-Quality Audit Disclosure on Audit Effort and Informativeness
Authors:Christopher Calvin
Byungki Kim
Youil Chris Park
Keywords:Audit quality
Audit offices
Audit effort
Financial reporting informativeness
Date Issued:27 Jul 2019
Abstract:We provide evidence that audit quality disclosure increases auditors’ efforts and audit reports’ informativeness to equity investors only when audit clients’ underlying financial reporting quality is low. We find that auditors with restatement-announcing clients have greater audit lag on their concurrent, non-restating clients only when those clients have material weaknesses in internal controls. This finding is consistent with auditors taking action to decrease the insurance value, and increase the informativeness value, of audit reports following the revelation that they are low quality auditors. We find that these actions result in lower bid-ask spreads, lower stock illiquidity, and higher long-term operating performance of the affected audit clients, consistent with greater audit effort leading to greater financial reporting informativeness. Our audit effort results are more pronounced for Big N auditors, which have greater ability to reallocate audit resources between clients. Our operating performance results are more pronounced for financially-constrained and capital-issuing audit clients, consistent with these clients being more reliant on informed investor decisions. Taken together, our results are informative to the audit quality indicator project currently being evaluated by the Public Company Accounting Oversight Board and to the growing literature on audit quality.
Appears in Collections: 02 Auditing

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