Audit transparency and auditor's reporting behaviour
Creators: name: Zhang, Fanyuan
Publisher: name: The Australian National University
Year: 2019

description: This thesis focuses on the enhanced auditor's reports that were first introduced in the United Kingdom (UK) from 2013, with similar auditing standards subsequently introduced in many jurisdictions. To enhance audit transparency, national regulators adopted standards for enhanced audit reports, requiring auditors to tailor reports that identify material audit-related matters for an engagement in a particular year. The first three implementation years of extended auditor's reports (EARs) in the UK, from September 30, 2013 to September 30, 2016 are examined in this thesis, to understand better the way auditors behaved in implementing the new reporting requirements. The thesis addresses the following three research questions (as three separate studies) that are collectively concerned with the content of the more tailored EARs: (1) Is auditors' standardized wording usage in EARs a consequence of the underlying audit quality?; (2) Are auditors' risk disclosures in EARs influenced by the expertise of the audit committee (AC)?; and (3) Are the year-to-year changes in EARs disclosures associated with audit effort? Study 1 examines whether textual similarities of an EAR to other EARs within the audit firm's client portfolio reflect the relative audit quality at the engagement level. Similarity scores are found to be positively related to abnormal accruals and negatively related to abnormal audit fees. While the relations for abnormal accruals are significant for both key audit matters (KAM) sub-sections and full EARs, they are stronger for the KAM sub-sections. Study 2 investigates whether auditors' reporting decisions are influenced by the expertise of the AC. AC influence is assessed by examining the relation between auditors' choices of KAMs relative to the significant accounting issues (SIFs) reported by ACs in the extended audit committee reports (EACRs), which the UK now requires under its new reporting regime. I find that AC expertise significantly affects the auditor's KAM disclosures, evidenced by fewer KAMs reported in EARs and more consistency between KAM disclosures and ACs' SIF disclosures. When analyzing cases pertaining to non-alignment of KAMs and SIFs, I find that changes in the ACs' accounting and industry expertise have significant effects on the auditors' subsequent adoption of SIFs that were not previously matched with KAMs. Further analysis of auditors' subsequent adoption of unmatched SIFs reveals a significant negative association with abnormal audit fees but no significant relation with abnormal accruals, suggesting that, on average, an auditor's initial omission of subsequently adopted unmatched SIFs may be a consequence of insufficient audit effort, but it is not necessarily a sign of lower audit quality. Study 3 investigates whether auditors' year-to-year changes in EARs disclosures are related to the underlying audit effort, proxied by audit fees. Changes in EARs from year to year are measured in terms of language usage and KAM selections. I find that audit fee changes are negatively associated with language similarity scores (measured over time for a single company) and "repeated" KAMs, and positively associated with "removed" and "added" KAMs, where the "added" KAMs effect is further found to be driven by the "new" KAMs that are not borrowed from the prior year's EACR. Overall, the results find that engagements with higher audit quality result in more tailored EARs and greater changes in EARs disclosures reflect more audit effort. The findings indicate that the contextual information included in EARs allows financial statement users to differentiate among auditors and the AC plays a critical role in this new reporting regime.