The Unintended Consequences of Uncertainty Disclosures Made by Auditors and Managers on Nonprofessional Investor Judgments

• In Event: Disclosures

Abstract

We examine how recent proposals requiring augmented auditor and management disclosures highlighting estimate uncertainty influence investors’ judgments and decisions. Specifically, we investigate not only the independent effects of auditor emphasis of matter (EOM) paragraphs but also whether and how these disclosures interact with management disclosures of estimate ranges to influence investment decisions. Using an experiment with nonprofessional investor participants, we find that while the EOM, as intended, highlights management’s uncertainty disclosure, it also has the unintended consequences of increasing investors’ perceptions of audit assurance and management credibility, leading to higher likelihood of investment. Furthermore, we find that these effects are magnified when management’s disclosure provides a range of possible outcomes around the reported estimate. Our results have important implications for regulators, preparers and users of financial statements as we find that augmented auditor reporting may increase investor perceptions of audit assurance and management credibility and resultant investment decisions.

Authors

• Andrea Seaton Kelton, Wake Forest University

• Norma Ramirez Montague, Wake Forest University