Audit pricing of hard-to-read annual reports

Cho, Meeok; Hyeon, Jiwon; Jung, Taejin; Lee, Woo‐Jong

doi:10.1080/16081625.2019.1600418

Cited by 24 publications

(27 citation statements)

References 39 publications

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“…It means local auditors are more familiar with employed terminology and their act of use in financial reports, therefore less effort is needed to have Auditor characteristics and readability of notes deeper understanding of such information (Krishnan and Yang, 2009;Oussii and Taktak, 2017). Cho's et al (2019) findings imply that while auditors exert additional effort to reduce the audit risk embedded in unclear annual reports, they do not charge a higher fee premium. Abernathy et al (2019) show that firms with less readable footnotes have longer audit report lag.…”

Section: Audit Report Lag and Readability Of Financial Statement Notesmentioning

confidence: 92%

“…The second group is concerned about other aspects of readability. For this purpose, some scholars analyzed the impact of a complexity of information disclosure, and report lower stock liquidity (Miller, 2010;Lawrence, 2013), greater return volatility (Loughran and McDonald, 2014), more frequent stock price crashes (Kim et al, 2016), more dispersed earnings forecasts (Lehavy et al, 2011), higher loan interest rates and stricter loan contract terms (Ertugrul et al, 2017), less favorable credit ratings (Bonsall and Miller, 2017), intense information asymmetry (Aymen et al, 2018;Luo et al, 2018) greater audit hours and fees (Cho et al, 2019;Abernathy et al, 2019;Altass, 2016;Jang and Rho, 2016), longer audit report lag (Abernathy et al, 2019), greater possibility of receiving going concern opinion (GCO) (Abernathy et al, 2019), compared with other firms. Despite the extensive range of audit works and their applications, from the highest national level to the smallest business firm, the determining factors for audit fee are not fully recognized yet.…”

Section: Introductionmentioning

confidence: 99%

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Auditors’ response to readability of financial statement notes

Salehi

Bayaz

Mohammadi

et al. 2020

ARA

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PurposeThe main objective of the present study is to assess the potential impact of readability of financial statement notes on the auditor's report lag, audit fees and going concern opinion (GCO).Design/methodology/approachThe statistical population of this study includes all listed firms on the Tehran Stock Exchange (TSE) for the period of 2012–2017. The systematic elimination method is used for sampling and multiple regression and EViews software are used for testing the hypothesis models.FindingsThe obtained results show that there is a significant and positive relationship between audit report lags and readability of financial statements. Moreover, it is also revealed that readability of financial statements is positively associated with audit fees. Furthermore, the findings suggest a negative correlation between readability indexes and issuing GCOs, denoting hard-to-read statements is considered as a risk factor by auditors. Finally, the observations of our robustness tests suggest that the association between audit report lag and readability of financial statements is robust.Originality/valueThis is the first conducted investigation concerning auditor's response to the readability of financial statement notes in TSE. The outcome of current paper may pave the way for revising and developing Iranian accounting standards in order to give a fairer and clearer picture of financial reports.

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Section: Audit Report Lag and Readability Of Financial Statement Notesmentioning

confidence: 92%

Section: Introductionmentioning

confidence: 99%

Auditors’ response to readability of financial statement notes

Salehi

Bayaz

Mohammadi

et al. 2020

ARA

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show abstract

“…FOG: financial statement readability. To calculate the readability of financial statement notes, according to the study of Lawrence (2013), Ajina et al (2016) and Cho et al (2019), the following index is used, the reliability and validity of which for examining Persian text readability are confirmed by some local scholars. Financial reporting readability index is FOG (FOGIND), which is a function of two variables of sentence length (based on words) and complicated words (defined in the form of number of three or multisyllabus words) and is calculated as follows: …”

Section: Methodsmentioning

confidence: 99%

The relationship between management characteristics and financial statement readability

Seifzadeh

Salehi

Abedini

et al. 2020

EMJB

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PurposeThe present study attempts to assess the relationship between management characteristics (managerial entrenchment, CEO narcissism and overconfidence, managers' myopia, real and accrual-based earnings management) and financial statement readability of listed firms on the Tehran Stock Exchange. In other words, this paper seeks to answer the question that “whether management characteristics have a favorable effect on financial statement readability or not.”Design/methodology/approachMultivariate regression model is used to meet the purpose of this study and research hypotheses are also examined using a sample of 1,050 listed observations on the Tehran Stock Exchange during 2012–2017 and by employing multiple regression patterns based on panel data technique and fixed effects model. Moreover, exploratory factor analysis of six variables (tenure, board independence, CEO duality, CEO ownership, board compensation and CEO change) is used for calculating managerial entrenchment and the FGO index is used for measuring readability.FindingsThe obtained results show that there is a negative and significant relationship between managerial entrenchment and accrual-based earnings management and a positive and significant relationship between real earnings management, managers' myopia, managers' narcissism and overconfidence and financial statement readability.Originality/valueSince the present study is the first paper to investigate such a topic in the emerging markets, it provides useful information about intrinsic and acquisitive characteristics of management for accounting information users, analysts and legal institutions that contribute greatly to financial statement readability. Besides, the results of this study aid the development of science and knowledge in this field and fill the existing gap in the literature.

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“…For instance, Bronson et al (2017) document that auditors assign additional efforts to foreign firms cross-listed in the US market than domestic US firms, lowering their litigation risks. Cho et al (2019) show that auditors exert more effort when their clients' annual reports have lower readability. Asante-Appiah (2020) reports that auditors' efforts are positively associated with firms' negative reputation in environmental, social and governance practices.…”

Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 98%

Do audit efforts increase the future equity value of client firm?

이¹,

Choi

Ryu

2021

MAJ

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Purpose The purpose of this study is to examine the association between additional audit efforts and clients’ future equity value. The study hypothesizes that auditors’ additional audit efforts directly increase clients’ stock return performance. Additionally, this study expects that the additional audit effort lowers the likelihood of audit failure and improves accounting information quality, thereby indirectly increasing clients’ future equity return performance. Design/methodology/approach The regression and portfolio return tests are conducted using observations from 2003 to 2016. This study uses the abnormal audit hours as a proxy for additional audit effort using mandatorily disclosed audit hour data from Korean listed firms. The study also conducts mediation analyses to examine the causal intermediate steps that link audit effort to client equity return performance. Findings The paper documents a significant and positive association between abnormal audit hours and clients’ subsequent years’ stock return performance and Tobin’s Q. This finding is accentuated for clients audited by Big N auditors or with greater demand for superior audit service. This finding is robust after controlling for various proxies of accounting quality. The portfolio return tests also find evidence that investors cannot fully perceive the value of audit efforts. A battery of additional tests does not alter the main findings. Practical implications The results provide implications for investors and policymakers by emphasizing the importance of audit efforts in value-creation. Moreover, this study’s findings suggest that auditors’ assurance, insurance and information roles are all the important drivers of this value-creation. Originality/value This study highlights a prominent feature of audit effort that enhances the value of auditees.

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Audit pricing of hard-to-read annual reports

Cited by 24 publications

References 39 publications

Auditors’ response to readability of financial statement notes

Auditors’ response to readability of financial statement notes

The relationship between management characteristics and financial statement readability

Do audit efforts increase the future equity value of client firm?

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