Does Intellectual Capital Disclosure Matter for Audit Risk? Evidence from the UK and Italy

Chiara Demartini and Sara Trucco
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Chiara Demartini: Department of Economics and Management, University of Pavia, Via San Felice 5, Pavia 27100, Italy
Sara Trucco: Faculty of Economics, Rome University of International Studies, Via Cristoforo Colombo 200, Roma 00147, Italy

Sustainability, 2016, vol. 8, issue 9, 1-19

Abstract: Disclosure theory argues that better information quality reduces audit risk, by decreasing information asymmetry in the market and consequently, information risk for firms. Extant literature on voluntary disclosure analyzes the relationships between Corporate Social Responsibility (CSR) and audit risk, finding that auditors charge lower fees and issue less going concern opinions to firms with good CSR performance. In this study, we test the relationship between intellectual capital disclosure (ICD) and audit risk and we assess the effect of ICD and audit risk on audit fees. To do so, we use data from the ESG Asset4 database (Thomson Reuters Datastream) on 166 UK and 27 Italian listed firms that issue stand-alone social and intellectual capital statements. The audit risk is measured from both a qualitative and a quantitative perspective. Panel data analysis on 2004–2011 years has been used to test our research hypotheses. Empirical findings from a sample of UK and Italian listed companies show that auditors estimate a lower qualitative risk, albeit a higher quantitative one, for those companies reporting higher ICD scores, compared to those ones with lower disclosure scores on the intellectual capital. Furthermore, we find that reputation risk contributes to the relationship between ICD and audit risk.

Keywords: intellectual capital disclosure; audit risk; audit fees; voluntary disclosure; country analysis (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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