The Value Relevance of Managers' and Auditors' Disclosures About Material Measurement Uncertainty

Abstract

Regulators now require auditors to provide information about how they evaluate complex estimates. Because users encounter this auditor-provided information alongside management-provided information, we jointly examine the value relevance of these disclosures. We also examine whether visual cues in audit reports influence how nonprofessional investors use these disclosures. We find that disclosures from managers and auditors provide different value-relevant information about the same underlying issue. While users struggle to weight fully narrative auditor disclosures in their valuation judgments without corresponding management disclosures, visual cues facilitate their weighting of information about the audit. Specifically, users take increased price protection when auditor disclosures also include visual cues. However, consistent with market signaling theory, corresponding voluntary disclosures from management attenuate this price protection. This suggests management can mitigate negative valuation effects that may arise from auditor disclosures, and implies that visual cues in audit reports can prompt managers to increase disclosure transparency. Data Availability: Contact the authors.

The art of conversation: the expanded audit report

“…The study's participants assign higher value to companies that have a relatively higher financial reporting quality. 27 Also, Dennis et al (2019) find that disclosures from managers and auditors provide different value-relevant information about the same underlying issue. These two last studies are interesting because they confirm that investors could respond to information if it helps to grade a company's financial reporting quality.…”

The Consequences of Key Audit Matters on Users: The Case of Spain

“…A possible explanation for not find any short market reaction to KAM disclosure is that the KAM disclosure maybe be anticipated by other information and/or are previous known by the audit committee and adequately addressed by auditors. When it comes to market reaction to KAM disclosure, most of the studies are experiments (Boolaky & Quick, 2016;Craver & Trinkle, 2017;Christensen, Glover & Wolfe, 2014;Dennis, Griffin & Zehms, 2019;Köhler, Ratzinger-Sakel & Theis, 2016;Sirois, Bédard & Bera, 2018). Another contribution is for standard audit setters, confirming the usefulness of the KAM disclosure, although not being supported by a short model as it is used by Gutierrez et al (2018) and Lennox, Schmidt and Thompson (2019) in the UK, and by Bédard et al (2018) in France.…”

Profitability, Audit Quality, and Firm Value: Case on Indonesian Manufacturing Companies

“…Fairfield et al (2003) explain that profitability is a market concern in determining its value. Dennis et al (2019) explain that company management has the primary responsibility to provide original information about its condition through management assertions in the financial reporting system. The information presented in the financial statements will be used by users for various aspects, such as investment decisions and providing company value.…”

“…Company management is expected not to abuse their authority and work properly in the company's owners' interests with the implementation of good corporate governance and rigorous external audits. Quality auditors are expected to reduce errors in presenting financial statements, prevent structured financial fraud, reduce excess accruals on earnings management, and improve the quality of the company's financial statements (Dennis et al, 2019). Hamdan et al (2012) state that audit quality became an essential issue when various global corporate financial scandals involved accountants and auditors.…”