Using a sample of 1512 firm year observations collected for 347 UK nonfinancial listed firms on the LSE FTSE ALL SHARES index, this paper investigates the impact of the recent change introduced by the FRC in the UK auditing standards on the quality of audit provided. This recent change requires auditors to provide extended disclosures about risks of material misstatements (RMMs) they have audited and how they dealt with them. This paper examines the impact of extended auditor’s report (EAR) on the timeliness of goodwill impairments reporting over the period 2010 to 2016. Given the presence of low-performance indicators suggesting that impairment is likely to have occurred, we document larger amount of impairment loss post the implementation of the EAR. Furthermore, the size of goodwill impairment is positively associated with the auditor’s decision to consider goodwill impairment as a risk item (ADGIMP). Overall, our results indicate higher audit quality is associated with the introduction of EAR in general and the auditor decision to consider specific item as a risk item, in particular. Our conclusions suggest that the new reporting regime is associated with a decrease in opportunistic earnings management. This study should inform standard setters, companies, investors, and academic research on audit quality.
|Publication status||Published - 8 Apr 2019|
|Event||British Accounting & Finance Association: Annual Conference - University of Birmingham, Birmingham, United Kingdom|
Duration: 8 Apr 2019 → 10 Apr 2019
|Conference||British Accounting & Finance Association|
|Period||8/04/19 → 10/04/19|