Is expanded auditor reporting meaningful? UK evidence

Mohamed Elsayed, Tamer Elshandidy and Yousry Ahmed

Journal of International Accounting, Auditing and Taxation, 2023, vol. 53, issue C

Abstract: In 2013, the United Kingdom (UK) Financial Reporting Council (FRC) 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 has some influence on 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 (IAASB) and Public Company Accounting Oversight Board (PCAOB)) 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 (search for similar items in EconPapers)
JEL-codes: M41 M42 M48 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jiaata:v:53:y:2023:i:c:s1061951823000617

DOI: 10.1016/j.intaccaudtax.2023.100582

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