Abstract
We examine eects of disclosing precisions of audit opinions (i.e., enhancing audit transparency) on auditor quality and investment e¢ ciency in a setting where the useful- ness of an audited …nancial report is jointly determined by the quality of the underlying …nancial reporting (i.e., a mapping from a …rm's fundamentals into an unobservable true accounting signal), misreporting of the true signal by the …rm's manager, and audit quality (i.e., the precision with which audit evidence collected by the auditor correctly captures the underlying true accounting signal and hence uncovers manager- ial misreporting). In our model, the auditor exerts an unobservable eort to in‡uence audit quality and is motivated by liability in the event of an audit failure. We show that while higher transparency enhances the information decision usefulness of audited …nancial reports for investors, it can also adversely aect the auditor's incentives and consequently lower the expected audit quality and investment e¢ ciency. We show that the underlying quality of …nancial reporting is an important determinant for this
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