The Effect of Increased Audit Disclosure on Financial Statement Users' Perceptions of Management, Auditors, and Financial Reporting

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 6: Financial Statement Credibility and Misstatements

Abstract

Standard setters recently proposed increasing auditor disclosures and reporting. In this study, I examine the effects of auditor-provided disclosures surrounding management estimates on financial statement users’ perceptions of auditor independence, management credibility, reporting quality, and investment decisions using an experiment. I manipulate auditor agreement with management’s estimates and whether the estimates are incentive-consistent for management. Contrary to expectations, I find that users view auditors as more (less) independent when they agree (disagree) with management, given an unqualified opinion. I also find that auditor disclosures are value-relevant for financial statement users, and that users are able to identify management bias using auditor disclosures. Furthermore, users’ perceptions of management credibility and auditor independence influence perceived financial reporting quality, which in turn affects users’ investment decisions. The findings provide empirical support for the argument that auditor disclosures would increase the transparency and value-relevance of the audit report. However, I also find evidence supporting auditors’ fears that expressing disagreement with management in an auditor-provided disclosure may present a confusing or conflicting message.

Author

• Marcus Mason Doxey, University of Kentucky