Investors’ Reactions to the PCAOB’s Proposed Changes to the Standard Audit Report

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 16: Audit Reporting

Abstract

As part of its efforts to improve the informational value of the standard audit report, the PCAOB has proposed two alternative changes to the current reporting model. These proposals have been met with approval from investor groups and with pessimism from preparers. This study examines how these two alternative proposals influence investors’ valuation judgments, as well as their evaluations of management and the auditor. We find that neither the inclusion of a critical audit matter in the audit report nor the addition of an Auditors’ Discussion and Analysis influence investors’ valuation judgments. We also find the detailed disclosures contained in the AD&A improve investor perceptions of auditor credibility and audit report reliability, while having no impact on perceptions of management credibility. Furthermore, the discussion of a CAM in the audit report lowers investor perceptions of management credibility, while having no influence on either auditor credibility or audit reliability. These results suggest the level of detail required to be disclosed in the PCAOB’s proposals can impact the information asymmetry between management and investors, but that neither reporting model provides value relevant information to investors.

Authors

• Brian Todd Carver, Clemson University

• Brad Trinkle, Mississippi State University