Abstract
Risk disclosures are among the most important types of non-financial information valued by the investors. Risk disclosures are mostly narrative and proprietary in nature; consequently, their accuracy and assurance are highly important to prevent disclosures from becoming boilerplate and losing their relevance. By exploiting the unique features of a setting where risk disclosure is mandatory and under a positive assurance requirement, we investigate whether the quality of audited risk disclosures is associated with the type of audit firm (Big-4 versus non-Big-4), the characteristics of the audit firm, and the attributes of the audit partner. Our results show an association between risk disclosure quality and auditors, but not in the expected ways. After the enforcement of a regulation requiring a detailed description of risks in the Operating and Financial Review (OFR) and a positive assurance of external audit over these disclosures, we do not document any significant Big-4 effect. The quality of risk disclosures is associated with the attributes of the audit partner, namely, familiarity with different client risk disclosures, industry expertise, and gender, independently of an affiliation with a Big-4 audit firm. Along these lines, we extend recent evidence on the audit partner effects in the assurance of non-financial narrative information.
Highlights
Stakeholders need information to reduce adverse selection and agency costs
We investigate whether the quality of audited risk disclosures is associated with the type of audit firm (Big-4 versus non-Big-4), the characteristics of the audit firm, and the attributes of the audit partner
Because the positive assurance of risk disclosures differs from the traditional auditing of financial statements, we expect that the level of risk disclosures under positive assurance requirement is associated with audit partner characteristics, such as industry expertise, familiarity with client risk disclosures, and gender
Summary
Stakeholders need information to reduce adverse selection and agency costs. The importance of non-financial information has significantly increased in recent years, and risk disclosures are one of the most important types of nonfinancial information valued by investors (Campbell et al, 2014; Hope et al, 2016; Kravet & Muslu, 2013). Our results show that the quality of mandatory risk disclosures, after the enforcement of a regulation that requires a detailed description of risks in the OFR and a positive assurance of external audit over these disclosures, is associated with the characteristics of the audit partner (namely, familiarity with different client risk disclosures, experience, and gender). We extend the existing literature that recognizes the possible audit firm effect (Abraham & Shrives, 2014) but is almost silent on the auditor-related determinants of risk reporting and focuses only on reporting the differences between the Big-4 and non-Big-4 clients in countries where risk disclosure is mandatory, but not under a positive assurance regime (Campbell et al, 2014; Elshandidy & Neri, 2015).
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