Combined Assurance as a New Assurance Approach: Is It Beneficial to Analysts?

Abstract

One of the challenges associated with the concept of “Integrated Reporting” (IR) is finding efficient and effective means to enhance the credibility of an integrated report. These reports entail disclosures on a variety of “capitals” (beyond merely financial capitals) as well as connectivity among them, describing how these capitals combine to contribute to the value-creation processes of companies. This study examines the emerging adoption of a cost-efficient credibility-enhancing mechanism for integrated reports, that is, the combined assurance model, where the credibility-enhancing processes of the internal auditor, the external auditor and those charged with governance are reported by the company (audit committee). We examine whether the adoption of the combined assurance model makes a difference to analysts’ earnings forecasting outcomes. We find consistent results that the implementation of a combined assurance model helps reduce information risk, reflected by a significant and negative association with analysts’ earnings forecast dispersion. However, we do not find any significant effect of this new assurance approach on analysts’ forecast error, suggesting that this new approach mainly plays the role of enhancing the reliability of already disclosed information at this stage without adding new information to the capital markets. These findings have implications for organizations providing both financial and non-financial disclosures in the one report, and for standard-setters and regulators as they explore cost-efficient mechanisms for these reports.