The Effects of an EOM in the Auditor Report on Management Reporting Behavior and Informative Value: The Case of Going-Concern Disclosures

• In Event: Audit Reports

Abstract

This paper exploits recent changes in Canadian accounting and auditing regulation which offer a natural experiment to examine the effects on management reporting behavior and information value. Specifically, we investigate the impact of stricter guidance from an accounting standard on the going concern assumption and of a requirement for the auditor to add an emphasis of matter paragraph when management reports a going concern uncertainty. Regarding management reporting behavior, our empirical results suggest that “responsibilizing” management for going concern uncertainties through a specific accounting standard increases management’s propensity to disclose such uncertainties. Moreover, requiring auditors to include an emphasis of matter paragraph in the auditor report, further increases management propensity to disclose such uncertainties. Regarding investors reaction to an emphasis of matter paragraph, we find that investors react differently to the disclosure of going concern uncertainties in the financial statements when it is also mentioned in an emphasis of matter paragraph than when it is not. Overall, these results suggest that, ceteris paribus, audit report’s emphasis of matter paragraph affects both the firm reporting behavior and market reaction to the information disclosed.

Authors

• Jean Bedard, Université Laval

• Carl Brousseau, Université Laval

• Ann Vanstraelen, Universiteit Maastricht