How Does the Audit Report's Structure Affect Nonprofessional Investors' Attention to Its Content?

• In Event: Investor Judgment and Decision Making

Abstract

This study experimentally examines how two potential changes to the audit report’s structure affect the extent to which nonprofessional investors attend to the report’s content when evaluating a potential investment. Results indicate that when the audit opinion is unqualified and the report includes descriptive paragraph headings, investors perceive the report to be more readable, which, in turn, leads them to attribute higher levels of reliability to the financial statements and increases their likelihood to invest. I also find that the influence of audit report structure differs across levels of investor sophistication. Specifically, the effect of headings on less sophisticated investors interacts with the relative location of the opinion paragraph, leading them to rely on subjective feelings to inform their judgments. In a second experiment, I examine whether audit report structure affects investors’ ability to identify departures from the standard unqualified opinion, and find that the relative location of the opinion paragraph moderates the effect of headings regardless of investor sophistication.

Author

• Brian Matthew Goodson, University of Cincinnati