The Effect of Expanding the Audit Report on Managers’ Communication Openness

• In Event: Behavioral Implications of the Auditor's Report

Abstract

Using an experiment, this study investigates whether including additional audit-procedure and/or accounting-estimate details in the audit report influences how openly managers communicate with their auditors. Extant research has focused primarily on the benefits of various changes to the auditor-reporting model. Our study complements and extends this literature by examining a potential cost. We hypothesize that as auditors are required to disclose new information about a firm in the audit report, managers will be less willing to share information about their accounting choices with their auditors. Results reflect this to be the case; participants in our study shared less private information with their auditors when faced with an auditor-reporting regime that requires the auditor to publicly discuss the participant’s key accounting estimates relative to an auditor-reporting regime that does not have this requirement. We further find that a disclosure focused solely on audit procedures does not have the same adverse effect for communication, particularly when participants trust their auditors. Overall, our study highlights the importance of understanding the net benefits that a shift in disclosure control may have on firms’ audit and financial reporting quality before implementing any proposed changes to the auditor-reporting model.

Authors

• Nicole Cade, University of Washington-Seattle

• Frank Hodge, University of Washington-Seattle