Why Are Expanded Audit Reports Not Informative to Investors? Evidence From the UK

54 Pages Posted: 19 Jun 2015 Last revised: 3 Jun 2021

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Jaime J. Schmidt

University of Texas at Austin

Anne Thompson

University of Illinois at Urbana-Champaign

Date Written: May 27, 2021

Abstract

Standard-setters worldwide have passed new audit reporting requirements aimed at making audit reports more informative to investors. In the UK, the new standard expands the audit reporting model by requiring auditors to disclose the risks of material misstatement (RMMs) that had the greatest effect on the financial statement audit. Using short window tests, prior research indicates that these disclosures are not incrementally informative to investors (Gutierrez, Minutti-Meza, Tatum, and Vulcheva 2018). In this study, we investigate three potential explanations for why investors do not find the additional auditor risk disclosures to be informative. First, using long-window tests, we find no evidence that the insignificant short-window market reactions are due to a delayed investor reaction to RMMs. Second, using value relevance tests, we show that the insignificant market reactions are not due to auditors disclosing irrelevant information. Finally, we provide evidence suggesting that RMMs lack information content because investors were already informed about the financial reporting risks before auditors began disclosing them in expanded audit reports.

Keywords: Audit reporting, Disclosure, Risks of material misstatement

JEL Classification: M41, M42, M48

Suggested Citation

Lennox, Clive and Schmidt, Jaime J. and Thompson, Anne, Why Are Expanded Audit Reports Not Informative to Investors? Evidence From the UK (May 27, 2021). Available at SSRN: https://ssrn.com/abstract=2619785 or http://dx.doi.org/10.2139/ssrn.2619785

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Jaime J. Schmidt

University of Texas at Austin ( email )

Austin, TX 78712
United States

Anne Thompson

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

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