Tell Me More: A Content Analysis of Expanded Auditor Reporting in the United Kingdom

Abstract

This study examines the effect of expanded audit disclosures required by ISA 700 (UK and Ireland), The Independent Auditor's Report on Financial Statements, on the communication value of the audit report. The new ISA 700 audit report is the first attempt by an auditing standard-setter to include expanded auditor disclosure in the audit report. The expanded disclosures significantly alter the pass/fail audit report model; however, it is not immediately clear that more audit report disclosures improve communication value. University and members of the PhD Project Accounting Doctoral Student Association during my matriculation. I am especially grateful for the camaraderie and friendship of my fellow classmate, Erik Lewis Beardsley. I appreciate the insights on the expanded audit report from senior audit practitioners in the United Kingdom that were integral to my research process. I thank Colin Chapman for his assistance in collecting the UK annual reports used in this study. I gratefully acknowledge generous financial support from Texas A&M University, Mays Business School, AICPA Foundation, and KPMG Foundation. I extend my deepest gratitude to the great "cloud of witnesses" that have provided their unyielding support of my academic endeavors. I am grateful for the leadership of Dean Emeritus Quiester Craig and the accounting faculty at North Carolina A&T State University for providing the initial spark of intellectual curiosity that led me to pursue my doctorate in accounting. I also appreciate the vision of Bernie Milano to increase the number of minority professors in business schools. I will always treasure the advice and wisdom shared by countless mentors, counselors, and friends that kept me on the path to completion. I will endeavor to pay these kindnesses forward to future accounting academics. Finally, I am forever indebted to my family who shared in this journey with me. To God be the glory for the marvelous things He has done. v

Is More Always Better? Disclosures in the Expanded Audit Report and Their Impact on Loan Contracting

“…Our study adds to the emerging literature on the effects of adjusting the informational content of the audit report (Amiram et al 2017;Lennox et al 2018;Reid et al 2016;Gutierrez et al 2018;Smith 2017), and is, to the best of our knowledge, the first study to empirically assess its usefulness from a debt market perspective. Our study contributes to both the loan contracting and the auditing literature by documenting that the expanded audit report disclosures (1) shape loan contracting by reducing borrowers' information asymmetry, and 2represent a direct channel through which banks gather information regarding borrowers' risk of financial misreporting.…”

“…The empirical results provide evidence that lenders use RMM information when determining loan contracting terms and, more importantly, that they distinguish between different types of RMMs when deciding on these terms. Consequently, our study contributes to the literature on the usefulness of mandatory audit disclosure (Leftwich 1983;Dye 1990;Admati and Pfleiderer 2000;Lennox and Pittman 2011) and complements the emerging stream of literature that assesses the equity market effects of adjusting the informational content of the audit report (Amiram et al 2017;Smith 2017;Gutierrez et al 2018;Lennox et al 2018;Reid et al 2018). We are, to the best of our knowledge, the first to empirically assess the usefulness of the expanded audit report for private debt holders.…”

“…However, other papers document reduced financial analyst dispersion (Smith 2017) and a significant increase in the earnings response coefficient in the period after the adoption of the long-form audit report (Reid, Carcello, Li, and Neal 2018), although Gutierrez et al (2018) challenge Reid et al's finding. In this study, we add to the previous literature by examining the relevance of the expanded audit report from the perspective of private debt holders. 2 This examination is important for at least two reasons.…”

“…Drawing on the incomplete revelation hypothesis(Bloomfield 2002) and the use of heuristics to process complex information(Tversky and Kahneman 1974;Hirshleifer and Teoh 2003), studies indicate that small, less sophisticated investors are significantly affected by the readability of a text (e.g., Lee 2012). However, experimental (e.g.,Tan, Wang, and Zhou 2014) and archival studies (e.g., Miller 2010;Lehavy, Li, and Merkley 2011;Smith 2017) show that large, more sophisticated investors are also affected by poor readability. Recent academic research pays greater attention to the impact of the reports' content on loan characteristics (e.g.,Bonsall and Miller 2017;Ertugrul et al 2017).…”

Female Audit Partners and Extended Audit Reporting: UK Evidence

“…In Model 4, the dependent variable, READABILITY, captures the extent audit reports easily communicate their message about the audit process to their intended audience (Henry and Leone 2016;Smith and Smith 1971;Smith 2019). This is measured by the widely used Fog index score, which increases with level of difficulty (De Franco et al 2015;Smith 2019;Smith and Smith 1971;Velte 2018). The Fog index 7 formula is as follows:…”