Are All Standard Audits the Same? Non-Standard Audit Report Language and Financial Reporting Quality

• In Event: Audit Reports

Abstract

This study investigates whether auditors communicate information about client financial reporting risk by adding voluntary explanatory language to standard (i.e., unqualified) audit reports. Standard-setters view unqualified audit reports with explanatory language to be equivalent to unqualified audit reports without explanatory language. However, auditors are unlikely to insist upon wording changes unless concerns about financial reporting risk exist. Examining financial statements issued during 2000 – 2009 with unqualified audit reports, we investigate whether the existence and type of explanatory language is associated with poor financial reporting quality as measured by the subsequent restatement of the current year financial statements. We find that financial statements with unqualified audit reports that include explanatory language are more likely to be subsequently restated than those without such language and that the financial statement accounts discussed in the explanatory language correspond with the financial statement accounts subsequently restated. Our results suggest that all standard audits are not the same because explanatory language added to unqualified audit reports is informative of financial reporting risk.

Authors

• Keith Czerney, University of Illinois at Urbana–Champaign

• Anne Margaret Thompson, University of Illinois at Urbana–Champaign

• Jaime J Schmidt, The University of Texas at Austin