The Effect of Increased Audit Disclosure on Financial Statement Users’ Perceptions of Management, Auditors, and Financial Reporting: An Experimental Investigation

Abstract

Regulators worldwide have recently proposed expanding the auditor’s report in a number of ways, with investors showing particular interest in additional information surrounding management estimates. This study uses an experiment to examine the effects of auditor-provided estimate disclosures on financial statement users’ perceptions of auditor independence, management credibility, reporting quality, and investment decisions. I manipulate auditor agreement with management’s estimates and whether the estimates are incentive-consistent for management. I find that estimate disclosures are value-relevant for users’ investment decisions. Additionally, given an unqualified opinion, users view auditors as more (less) independent when auditors agree (disagree) with management and management as less (more) credible when estimates are incentive consistent (inconsistent). In turn, independence and credibility perceptions influence perceived misstatement probability, financial reporting quality, and investment. The findings empirically support investors’ arguments that auditor disclosures regarding management estimates increase the transparency and value-relevance of the audit report.