Extended audit reporting and goodwill impairment quality: UK evidence

Extended audit report (EAR) has received substantial attention internationally and in the UK since the International Standard on Auditing (ISA) 700 mandates auditors disclose significant risks of material misstatement that are considered as key audit matters. This study aims to investigate the potential role of EAR in monitoring auditees’ complex accounting estimates such as the recognition of goodwill impairment. Using a sample of UK FTSE ALL SHARES over the period 2010-2016, the study findings provide various contributions to the current research. First, results show an improvement in the recognition of goodwill impairment loss following the EAR's adoption. In particular, the association between firms’ low-performance indicators and recognised goodwill impairment is much stronger post the EAR adoption. Moreover, this relationship is more pronounced when auditors flag goodwill impairment as a risk matter. These findings highlight the potential role EAR could play in controlling discretionary management behaviour, supporting the auditor's role in promoting confidence, reinforcing trust in the financial information, and hence mitigating the agency problem.