The Effects of Clarification of Independence and Internal Control Report on Equity Analysts' Confidence in Financial Reporting and Stock Recommendations

• In Event: Auditing (External/Internal)

Abstract

ABSTRACT

The Public Company Accounting Oversight Board (PCAOB) proposed and has adopted several changes to the standard audit report to make the report more informative and relevant to the public (PCAOB 2011, 2017). One such adopted change is the addition of a statement that explicitly states that the auditor is independent of the company. The position of the PCAOB is that the inclusion of an explicit clarification of independence statement will assure users that the report was produced by unbiased and independent professionals. However, there is no tested evidence to support such a claim. This study uses a 2 x 2 between-subjects experimental design to investigate whether an explicit clarification of auditor independence and type of internal control report affect equity analysts’ confidence in financial reporting and investing decisions. A total of 123 equity analysts were recruited through Qualtrics for the study. The results of the experiment suggest that the addition of an explicit clarification of auditor independence statement has a statistically significant impact on analysts’ confidence in financial reporting and stock recommendations, regardless of the type of internal control report that accompanies the standard audit report. The findings provide evidence to support the position of the PCAOB (2013; 2017) that the addition of an explicit clarification of auditor independence statement will provide the needed assurance that auditors understand their obligations to be independent

Author

• Kwadwo H Ofori-Mensah, Fort Hays State University