Audit Quality and Readability of the Annual Reports

Abstract

The purpose of this article is to examine the effects of audit quality, as proxied by Big 4 auditors and industry specialization, on the readability of the annual reports. Assuming that higher audit quality is associated with better readability, the authors empirically test whether (1) the readability enhances if audited by the Big 4 auditor and (2) the readability enhances if audited by the industry-specialized auditor. The authors find that the firms audited by Big 4 firms have less readable annual reports. The industry specialization does not affect readability, though Big 4 industry specialists are positively associated with less readable annual reports. The results also indicate that longitudinally the annual reports are becoming less readable, and the determinants of readability of the annual reports are changing and evolving, as our results differ from Li (2008)'s study. The authors believe that in the opposing forces of plain English movement and evolving and changing financial environment, certainly, the latter is winning.