Consequences of changing the auditor’s report: Early evidence from the U.K.

• In Event: International Evidence

Abstract

Investors and regulators worldwide have expressed growing concerns about the content of the auditor’s report. The audit regulator in the United Kingdom and Ireland, the Financial Reporting Council, has required significant changes to the auditor’s report for most large public companies with fiscal years starting October 1, 2012. The report has to describe the most significant risks of material misstatement; the application of materiality; and, the scope of the audit. We investigate the one-year effect of the changes to the report in terms of the cost of audits, audit quality, and investors’ reaction to the report’s filing. The regulatory cut-off resulted in having a group of new report adopters and a control group of non-adopters around the adoption date. We document that the new report resulted in a pre-post adoption increment in audit fees of approximately seven percent for adopter companies, compared to non-adopter companies. However, we do not find evidence that the new report had a one-year effect on audit quality or investors’ reaction. Further examining the content of the new reports for adopter companies, we find that the length of the report and the number of risks are positively associated with audit fees; the materiality amount is negatively associated with audit quality; and, the investor’s reaction is positively associated with the number of risks and the materiality amount. Our results are relevant for the PCAOB, IAASB, and other regulators presently considering changes to the auditor’s report, as well as for researchers and practitioners interested in the auditor’s report content.

Authors

• Elizabeth Gutierrez, Universidad de Chile

• Miguel A Minutti-Meza, University of Toronto - Rotman School of Management

• Kay W Tatum, University of Miami

• Maria Ivanova Vulcheva, Florida International University