Auditors and Disclosure Quality: The Case of Major Customer Disclosures

Abstract

SUMMARY Little is known about the relationship between disclosure quality and auditor quality. We measure disclosure quality as the likelihood of a firm fully disclosing the identity of their major customers in the Form 10-K filing. We also measure voluntary disclosure by exempt smaller reporting companies (SRCs) disclosing, and all firms disclosing the identity in the audited notes, or affirming no major customers. We expect that firms are more likely to disclose when they engage higher-quality auditors who have specialized knowledge of 10-K regulations. We hand-collect a sample of more than 26,000 (34,000) major customer disclosures that we use for our main tests (voluntary disclosure tests). We find that firms are more likely to mandatorily disclose their major customers' identity when audited by either an office- or national-level specialist whose clientele consists largely of firms with major customers. We corroborate these results with other higher-quality auditor measures: Big N, second tier, and office size. We also show that SRCs are more likely to voluntarily disclose when they engage a higher-quality auditor. We provide further evidence of an association between voluntary disclosure and a higher-quality auditor by ranking disclosure quality on audited disclosure, nonaudited disclosure, and no disclosure. JEL Classifications: M42; M41; D23. Data Availability: All data are available from public sources identified in the text.

The effect of audit fees on disclosure quality in Jordan

“…The existence of these violations raises many questions concerning audit quality; since such statements with violations are the product of the audit service, it needs to be asked if the violators have received an unqualified opinion in the year of the violation. Moreover, we are motivated by the limited evidence for the effect of auditor quality on disclosure quality (Legoria et al, 2018). Hence, this paper aims to answer the question of whether and how audit quality affects the quality of financial statements, as measured by disclosure violations in annual reports.…”

“…Hussainey (2009) found that investors' ability to forecast future earnings is better if financial statements are audited by one of the Big Four accounting firms. Legoria et al (2018), who examined the auditor quality and disclosure about their major customers, reported that firms audited by higher quality auditors are more likely to disclose their major customers' identity. However, it is worth noting that studies in developing countries have found no such association (Salehi et al, 2017) or a negative association (Grediani, 2019).…”

Investigating Fraud Risks Assessment Practices in Public Sector Audits

“…Competence Requirements Derrived from Misstatement result from fraudulent financial reporting Fulfilling the ethical code and professionalism (Ali et al, 2020;Fatt, 1995;Lai et al, 2018) Evaluate uncertainty of company's business process (Davies & Aston, 2011;Gibbins et al, 2001;Paino et al, 2014;Pedrosa & López-Corrales, 2018) Disclose the transparency of financial statements (Legoria et al, 2018;Muñoz-Izquierdo et al, 2019) Compliance with audit standard (Harahap et al, 2017;Melé, 2005;Rachmadia et al, 2020;Veiga, 2004) Giving the best quality of audit (DeAngelo, 1981;Harahap et al, 2017) Reduce conflict (Pham et al, 2020) Reduce earnings management risks (Almarayeh et al, 2020;Chae et al, 2020;Cohen et al, 2008)…”

Audit Quality and Stock Return Co-Movement: Evidence from Vietnam

“…Hussainey (2009) found that investors are able to improve theirpredictions on firms' future performance and reduce risks and uncertaintywhen accounting reports are verified by a high-quality audit firmssuch as the Big Four accounting firms. A recent study by Legoria, Reichelt, and Soileau (2017)investigating the effect of audit quality on corporate disclosure revealed that the quality of the audit firms explains the client firms'choice to mandatorily disclose their major customers' identities. In summary, the benefit of assurance is recognised in protecting financial report users, including investors, and in enhancing the transparency and efficiency of the information environment.…”