Narrative disclosures, firm life cycle, and audit fees

Abstract

This study examines the relationship between narrative disclosure properties in terms of readability, optimism, and ambiguity of annual reports and audit fees, and how the relationship changes across firms' various life‐cycle stages. Using 54,883 observations for the years from 2000 to 2016, we find that these textual disclosure properties have positive audit pricing consequences. We suggest that narrative disclosure properties play an important role in estimating audit risk, and thus in audit fees. We further posit that the audit fee consequences of these disclosure characteristics vary across different phases of a client firm's corporate life cycle. Though we observe that with a decrease in readability and an increase in optimism and ambiguity of disclosure language that audit fees increase in the introduction phase, a firm's entry to the growth phase moderates the influence of these narrative disclosure features on audit fees. However, the impact of these lexical features on audit fees increases as client firms switch (1) from the growth phase to the maturity phase and (2) from the maturity phase to the decline phase. Based on these findings, we argue that, when examining the audit fee implication for management's disclosure strategies, researchers should treat client firms as dynamic evolving entities.

Investigation on the strategy of business administration level of enterprises in the new economic environment

“…Furthermore, Hossain M investigated the impact of narrative disclosure features on audit fees and found that they had a positive impact on audit pricing and showed different effects at different stages of the company’s transformation. It emphasizes the dynamic nature of the firm and the importance of considering the stage of the firm’s life cycle when analyzing the relationship between narrative disclosure characteristics and audit costs [ 6 ]. In the pursuit of proficiency in skills and the relevance of information systems to business management in the digital age, Sihite M conducted an extensive review, uncovering a significant correlation between skills and successful business management [ 7 ].…”

أثر قابلیة التقاریر المالیة للقراءة ومراحل دورة حیاة الشركة على أتعاب المراجعة دراسة تطبیقیة على الشركات غیر المالیة المقیدة بالبورصة المصریة

“…) ‫بب‬ ‫بحلبييا:ب‬ ‫،لبثهعحبحثحاب‬ ‫ق‬ ‫ب‬ Flesch Reading Ease Index, flesh-kincaid grade; Fog Index, Bog Index‫;ب‬ SMOG Index, Lix Index, Cloze Procedure. (Li, 2008;Lo et al, 2017;Xu et al, 2020 (Callaghan et al, 2008;Yuniarti, 2011;El-Gammal, 2012;Barua et al, 2020;Chakrabarty et al, 2020 (Simunic, 1980;Kim and Fukukawa, 2013;Woo & Lim, 2015;Jiang and Son, 2015;Hossain et al, 2019;Salehi et al, 2020;Saghafi et al, (Hossain & Salama, 2018;Hossain et al, 2019;Salehi et al, 2020;Xu et al, 2020;Wang et al, 2021;Castro et al, (Hamers et al, 2016;Habib and Hasan, 2017;2019;Krishnan et al, 2021;Yoo et al, 2019;Akbar et al, 2019;Hussain et al, 2020;Can, 2020 (Hossain & Salama, 2018;Cho et al, 2019;Abernathy et al, 2019;Hossain et al, 2019;Castro et al, 2019;Blanco et al, 2020;Xu et al, 2020;Salehi et al, 2020;Karim and sarkar, 2020;Kazemiolum et al, 2020;Wang et al, (Cho et al, 2019;...…”

Do auditors price litigious tone?

“…During the fee negotiation process, auditors spend a substantial amount of time and effort collecting and evaluating both qualitative and quantitative information about their clients (Brazel et al ., 2009; Greiner et al ., 2020). Because auditors analyse all client‐specific information when determining the pricing of audit services (Simunic, 1980; Brazel et al ., 2009; Abernathy et al ., 2019), textual disclosures assist auditors in evaluating engagement risks and structuring audit fees (Hossain et al ., 2019). Previous literature indicates that textual disclosures are informative and play a critical role in the evaluation of a firm’s business operations, risk profile, and financial condition (Campbell et al ., 2014; Loughran and McDonald, 2016).…”

“…However, Hossain et al . (2019) suggest that an overly optimistic tone in a client’s textual disclosures increases the auditor’s professional scepticism and audit effort, resulting in higher audit fees. More recently, Greiner et al .…”

“…For instance, prior research finds that optimistic tone is associated with lower audit fees (Bicudo de Castro et al, 2019) as optimistic tone reflects less risky financial reporting choices and therefore implies lower inherent risk compared with pessimistic tone. However, Hossain et al (2019) suggest that an overly optimistic tone in a client's textual disclosures increases the auditor's professional scepticism and audit effort, resulting in higher audit fees. More recently, Greiner et al (2020) use textual disclosure tone as a proxy for source credibility and find that tones conveying certainty and optimism in textual disclosures reflect lower source credibility and are associated with higher audit fees.…”