The Effect of Auditor Reporting Choice and Audit Committee Oversight Strength on Management Financial Disclosure Decisions

• Main Author: Fuller, Stephen
• Format: Others
• Published: ScholarWorks @ Georgia State University 2015
• Online Access: http://scholarworks.gsu.edu/accountancy_diss/16; http://scholarworks.gsu.edu/cgi/viewcontent.cgi?article=1015&context=accountancy_diss

Motivated by the current PCAOB proposed standard regarding expansion of the auditor’s reporting model, this study investigates the effect of auditor reporting choice on management disclosure decisions. The proposed standard would require auditors to identify and provide information about the most significant audit and financial reporting issues encountered during the audit in a new section of the audit report on Critical Audit Matters (CAMs). I develop theory to predict how auditor choices about reporting on CAMs might affect manager disclosure decisions. In addition, the study investigates how the effect of auditor reporting choice on management disclosure decisions depends on a very important governance structure, the audit committee. I find that management reacts to the auditor shining a spotlight on a highly uncertain critical accounting estimate by increasing their own disclosure of the matter and that this effect varies directly with the strength of the audit committee’s oversight. In addition, I find that as auditors increase the level of detail provided by the auditor in its CAM reporting, management responds with increased disclosure. Finally, when the auditor provides a detailed CAM discussion, it appears that managers are likely to increase disclosure of quantitative information that would enhance the financial statement user’s ability to quantify the risk in a critical accounting estimate. The study provides ex ante insights on how a mandated change in the auditor’s reporting model might affect the level of information provided by management and received by investors.