The unintended consequences of uncertainty disclosures made by auditors and managers on nonprofessional investor judgments

Andrea Seaton Kelton and Norma R. Montague

Accounting, Organizations and Society, 2018, vol. 65, issue C, 44-55

Abstract: We examine how recent proposals requiring augmented auditor and management disclosures highlighting estimate uncertainty influence investors' judgments and decisions. Specifically, we investigate the effects of auditor emphasis of matter (EOM) paragraphs, both independently and in combination with management disclosures of estimate ranges, on investors' likelihoods to invest. Using an experiment with nonprofessional investor participants, we find that the EOM has the unintended consequence of increasing investors' perceptions of management credibility, leading to higher likelihood of investment. Furthermore, despite the ability of ranges to highlight uncertainty and downside risk, we find that management's disclosure of an estimate range does not impact the positive effect of the EOM on investors' propensities to invest, unless management provides a wide range. In this circumstance, we find that a wide range mitigates the positive influence of the EOM on investment decisions. Our results have important implications for regulators, preparers, and users of financial statements as we find that augmented auditor and management reporting may have unintended consequences on investor perceptions of management credibility and resultant investment decisions.

Keywords: Range disclosure; Estimation uncertainty; Audit report; Emphasis of matter; Credibility (search for similar items in EconPapers)
JEL-codes: C91 G11 G18 M42 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:aosoci:v:65:y:2018:i:c:p:44-55

DOI: 10.1016/j.aos.2017.10.001

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