Consequences of Expanded Audit Reports: Evidence from the Justifications of Assessments in France

Abstract

SUMMARY Since 2003, French auditors must disclose justifications of assessments (JOAs) in expanded audit reports. Like critical audit matters recently introduced in the U.S., and key audit matters introduced by international standard setters, the purpose of JOAs is to enhance the informative value of audit reports. Based on French audit reports from 2002 to 2011, we analyze the impact of first-time implementation of JOAs, and the impact of new JOAs in subsequent years, on investors (measured by abnormal returns and abnormal trading volume) and on the audit (measured by audit report lag, abnormal accruals, and audit fees). For both first-time implementation of JOAs and new JOAs in subsequent years, we find no significant market reaction to their disclosure and no significant effect on audit report lag, audit quality, and audit fees. Our results suggest that the French expanded audit report did not have the expected consequences on investors and the audit.

The audit expectation gap: A review of the academic literature

“…perceive auditors to be responsible for the preparation of financial statements or misinterpret KAMs as qualifications of the auditor opinion. Prior experimental and archival research on KAM analyzes whether the related information is decision-useful for the providers of capital and often fails to find a significant impact (Christensen et al 2014;Boolaky and Quick 2016;Gutierrez et al 2018;Lennox et al 2019;Bédard et al 2019). KAM disclosure could also impact auditor liability, however, the direction is unclear (Brasel et al 2016;Gimbar et al 2016;Kachelmeier et al 2017;Backof et al 2017).…”

Female Audit Partners and Extended Audit Reporting: UK Evidence

“…Our study extends the work of Breesch and Branson (2009) and Sierra-Garcia et al (2019) by investigating gender differences using a large sample of real audit reports from the UK audit market. It thus responds to calls for more research on how auditor characteristics influence audit reporting decisions (Church et al 2008) and on whether gender differences exist within highly professionalized auditor groups (Hardies et al 2015;Bédard et al 2019). It does similar for calls regarding audit-related readability studies (Fisher et al 2016), as it provides initial research on the relationship gender has with linguistic style, readability, and tone of audit reports.…”

“…Consistent with recent EAR studies (Bédard et al 2019;Lennox et al 2019;Sierra-Garcia et al 2019), the dependent variable in Model 1, KAM, is the natural log of the total number of risks disclosed in the KAM section of the audit report for firm i during year t. 3 The main independent variable of interest is GENDER, a dummy variable that equals 1 if a female audit partner audits the company and 0 otherwise.…”

“…Model 1 also uses a range of control variables commonly used in auditing literature and EAR studies to capture other auditor and firm-related characteristics (e.g. Bédard et al 2019;Gutierrez et al 2018;Sierra-Garcia et al 2019). Firmrelated variables include firm size (SIZE), firm risk (RISK), return on assets (ROA), quick asset ratio (QUICK), ratio of debt to total assets (DEBT), presence of a net loss in the current year (LOSS), and complexity (SEGMENTS).…”

Audit Partner Style in Key Audit Matter Reporting Decisions.

“…Our study provides numerous contributions to research and practice by pursuing two equally important objectives: (1) providing contemporary insight on KAM reporting,and (2) leveraging the KAM setting to advance understanding of audit partner decision style and its effect on other audit outcomes. Prior research presents mixed results regarding whether KAMs are informative to investors and whether the shift to a KAM reporting regime is associated with audit fees, quality, and auditor liability outcomes (e.g., Bédard, Gonthier-Besacier, and Schatt 2019;Gutierrez, Minutti-Meza, Tatum, and Vulcheva 2018;Reid, Carcello, Li, and Neal 2019;Kachelmeier, Rimkus, Schmidt, and Valentine 2019). We contribute to this research by proposing and testing a theory of audit partner-level KAM reporting styles that challenges the implicit assumption in existing event studies and difference-in-difference studies that the consequences of KAM reporting regimes are uniform across partners.…”