Clustering of Corporate Risk Disclosures under the Positive Assurance Requirement of the Incumbent Auditor: Finnish Evidence among the Big 4 Auditors

• In Event: Audit Reports

Abstract

I define clustering of corporate risk disclosures to mean that some client portfolios have abnormally high or low risk disclosure scores. Examining whether this happens in the Finnish stock markets among Big 4 auditors is the purpose of the study. Finland provides a unique setting to study this question because, unlike in the US and other major jurisdictions, in Finland risk reports have to be audited, and hence, the incumbent auditor has to give positive assurance for these reports. I analyze risk reports by Finnish firms listed in the Nasdaq Helsinki by using several measures for the level of risk disclosure which describe different dimensions of the quantity of the provided information. The results suggest that corporate risk disclosures cluster by the incumbent auditor. The clients of Ernest & Young have lower level of risk disclosures than the clients of other auditing firms. Especially, the clients of PricewaterhouseCoopers have high risk disclosure scores. This study contributes to prior literature by shedding light to potential quality differences that may exist in the audit market in respect of auditors’ competence and professional interest to provide positive assurance of risk reports.

Author

• Antti Miihkinen, Aalto University School of Business/University of Florida