Workplace Culture-Related Disclosure in Client-firm Form 10-K Reports and Audit Fees

Abstract

We document that disclosure of workplace culture-related information in client-firm Form 10-K reports is negatively related to audit fees. We contend that the costly public disclosure of client-firm workplace culture information allows the auditor to reduce audit work necessary on the quality of a client’s financial statements. We find that the negative relation is stronger when the auditor is located further away from its client firm, and when client firms are associated with non-specialist auditors, weaker monitoring, less analyst following, and higher probability of informed trading. These findings imply that the costs of client-firm workplace culture disclosure in 10-K reports may be offset by a larger reduction in audit fees. We also find that greater workplace culture-related disclosure in client-firm 10-K reports is associated with fewer financial restatements, lawsuits, less audit effort and lower likelihood of material weaknesses and auditor opinion on internal controls, and less audit effort. Collectively, our findings suggest that the information environment acts as a possible mechanism via which workplace culture disclosure in client-firm 10-K reports and audit fees are related. This study contributes to the literature by showing that workplace culture-related disclosure in annual reports influences auditing-related firm outcomes.