External audit plays a vital role in restraining the opportunistic managerial behaviour. This
research aims to investigate this role in the case of the discretionary decision related to goodwill
impairment. Prior studies on goodwill impairment highlight the opportunistic behaviour
exercised by managers while testing goodwill for impairment. Rather than using the discretion
allowed under the impairment approach to signal private information about the actual economic
circumstances of recorded goodwill, managers may act opportunistically to benefit from the
flexibility in accounting standards to accelerate/delay/avoid the recognition of goodwill
impairment loss.
The change in the audit reporting regime in the UK in 2013 mandated auditors to provide an
extended audit report (EAR). This is to disclose client-specific information related to the risks
of material misstatement (RMMs) that had the most significant effect on the overall audit
strategy; the allocation of audit resources; and the engagement team effort (FRC, 2013a).
Goodwill impairment is one of the highest three RMMs disclosed by auditors in the UK (FRC,
2015). Motivated by this regulatory change in the UK audit market, this thesis aims to study
the implications of the EAR through investigating its potential impact on the recognition and
value relevance of goodwill impairment.
Using a sample of UK FTSE ALL SHARES non-financial companies over the period from
2010 to 2016, the thesis provides 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 consider goodwill impairment as a risk item.
Second, extended auditor's disclosures are found to provide information that is relevant to
investors, since the negative association between reported goodwill impairment loss and
company's market value is moderated by the EAR adoption and the extent of auditor's
disclosures. These findings highlight the potential role that EAR could play in controlling
discretionary management behaviour and reducing information asymmetry, supporting the
auditor's role in promoting confidence, reinforcing trust in the financial information, and hence
mitigating the agency problem.
| Date of Award | 23 Jun 2020 |
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| Original language | English |
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| Awarding Institution | - University Of Strathclyde
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| Sponsors | University of Strathclyde |
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| Supervisor | Julia Smith (Supervisor) & Dimitris Andriosopoulos (Supervisor) |
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