Audit pricing of hard-to-read annual reports

Abstract

ABSTRACT This paper investigates the auditors’ responses to the readability of annual reports, which are important sources of information for auditors in their audit planning and pricing decisions. Using unique audit fee and hour data for Korean listed companies, we find that hard-to-read annual reports are positively associated with audit fees and audit hours. However, no empirical association exists between annual report readability and hourly fee rates. These findings imply that while auditors exert additional effort to reduce the audit risk embedded in unclear annual reports, they do not charge a higher fee premium. We further show that the association between annual report readability and audit variables (i.e. audit fees and hours) is most salient at the initial engagement but becomes weaker as the auditor tenure increases. The findings of this paper contribute to the literature on the auditors’ reactions to the clarity of annual reports.