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

• In Event: Audit Reports / Intermediaries

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. Using content analysis measures, readability and tone, as proxies for communication value, I find that in the post-ISA 700 period: 1) audit report readability improves and 2) audit report tone changes with a higher occurrence of negative and uncertain words. I also evaluate analyst behavior in response to the ISA 700 audit report. I find that analyst following and analyst forecast dispersion decrease in the post-ISA 700 period. In additional analyses, I show that Big N and industry expert auditors write audit reports that are more readable. I also find that domain-specific word dictionaries, generated from Form-10Ks and earnings press releases, have a lower frequency in audit reports in both the pre and post ISA 700 period. With the heightened global interest in improving the historical pass/fail audit report, these results show that expanded audit disclosures can be communicated in a manner that is accessible and meaningful to the financial statement user.

Author

• Kecia Williams Smith, Virginia Tech