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    Does Recent Academic Research Support Changes to Audit...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards 
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    Title:
    Does Recent Academic Research Support Changes to Audit Reporting Standards?
    Practical Implications:

    This study reviews academic literature to not only offer insights into how well recent audit reporting initiatives gives users the information they need to understand the audit, but also suggest future research that academics can perform to help standard setters improve the auditor’s report.  The authors argue that (1) disclosure of the audit partner’s name does close the information gap, (2) disclosures related to auditor independence and tenure only partially closes the information gap, and (3) auditor commentary on going concerns does not close the information gap; however, not enough is known about how well either (4) disclosure of critical or key audit matters or (5) assurance on other information in the audit report closes the information gap.  These insights may be of interest to stakeholders in the standard setting process who wish to evaluate the success of currently enacted audit reporting initiatives and the potential costs and benefits of proposed audit reporting initiatives.

    Citation:

    Bédard, J., P. Coram, R. Espahbodi, and T.J. Mock. 2016. Does Recent Academic Research Support Changes to Audit Reporting Standards?. Accounting Horizons 30 (2): 255-275.

    Keywords:
    audit reporting model, audit report, auditing, information gap.
    Purpose of the Study:

    Regulators interested in improving the informativeness of the auditor’s report have recently proposed/required new disclosures to be made by the auditor to help information users better understand the audit.  Academic researchers studied whether these new disclosures fulfill their intended purpose and/or have unintended consequences.  The purpose of this study is to synthesize the academic literature related to the new disclosures in order to identify (1) whether the benefits of specific new disclosures outweigh the costs, (2) whether further changes to the auditor’s report are needed, and (3) where more research is needed to better understand the effects of the new disclosures.  Thus, this study serves as a means of communicating the findings of academic research to standard setters in order to enable academics to better fulfill their information-gathering role in the standard setting process.

    Design/Method/ Approach:

    The author perform a review of the academic literature relevant to PCAOB, IAASB, and U.K. FRC audit reporting initiatives, specifically focusing on (1) disclosure of critical or key audit matters, (2) assurance on other information in the audit report, (3) auditor commentary on going concerns, (4) disclosure of audit partner name, and (5) disclosures related to auditor independence and tenure.  They obtain research published, posted online, or presented at conference(s) from 2007 through mid-2015, but mostly after 2011.

    Findings:
    • Not enough is known about how well disclosure of critical or key audit matters gives users the information they need to understand the audit.
      • Experimental evidence suggests that Critical Audit Matters (CAMs) disclosed in the auditor’s report may (1) draw users’ attention to areas discussed in the CAMs, (2) scare some nonprofessional investors away from companies with CAMs, (3) influence auditor liability and legal damages in unintended ways, (4) and discourage auditors from bringing problems to the attention of passive audit committees.  Furthermore, experimental evidence suggests that (1) the impact of additional disclosure from the auditor upon users may vary depending upon management disclosures and (2) managers may be reluctant to share information about accounting estimates with auditors who are required to make additional disclosures about these estimates.
      • Preliminary archival evidence from the U.K. is mixed in terms whether CAMs have a positive association with audit fees and audit quality, but suggests CAMs have no relationship with financial statement’s informativeness. 
      • Research about the French justifications of assessments disclosure suggests that they are generally boilerplate and uninformative, and they have no impact on audit quality (after the year of implementation).
      • Archival research from the U.S. on the effect of explanatory language on unqualified audit reports suggests that (1) some types of explanatory language provide information about financial reporting quality and (2) non-going concern explanatory language can increase/decrease disagreement among investors.
      • A review of stakeholder responses to the IAASB’s proposed audit reporting initiatives suggests that stakeholders generally approved of the changes, but had differing opinions of how much change was needed.
    • There is no evidence available about whether assurance on other information in the audit report gives users the information they need to understand the audit.
    • Auditor commentary on going concerns appears to not give users the information they need to understand the audit.
      • Although most studies find the going concern audit reports useful, one study finds them not incrementally valuable when they merely focus users’ attention on management’s going concern disclosures.
    • Disclosure of the audit partner’s name does give users the information they need to understand the audit.
      • Although some studies provide mixed evidence about whether disclosing the audit partner’s name increases audit quality, other studies suggest that (1) different audit partners are associated with different levels of audit quality and (2) the restatement history of the audit partner may scare off some potential investors.  However, higher audit fees appear to be the cost of disclosing this useful information.
    • Disclosures related to auditor independence and tenure give users some of the information they need to understand the audit.
      • Although a review of prior research suggests no link between non-audit services (NAS) and auditor independence, a recent study found that total NAS fees are associated with higher (lower) audit quality for issuers (non-issuers).
      • Although a review of prior research does not find decreased audit quality for firms with longer audit firm tenure, a recent study suggests that long audit firm tenure is only associated with decreased audit quality for audits of non-issuers.
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats