Financial Statement Footnote Readability and Corporate Audit Outcomes
Department
School of Accountancy
Document Type
Article
Publication Date
5-1-2019
Abstract
We examine whether the readability of financial statement footnotes in the annual report is informative about audit engagement risk. Using various readability measures, we predict and find that firms with less readable footnotes have longer audit report lag, incur higher audit fees, and are more likely to receive a first time modified going concern opinion. We also show that readability of footnotes is associated with a higher likelihood of financial misstatements and future accounting-related litigation. Our results are robust to several measures of readability used in prior literature, as well as different specifications and design choices, revealing that financial statement footnote readability provides incremental information about audit engagement risk that affects auditor-client contracting.
Journal Title
AUDITING: A Journal of Practice & Theory
Journal ISSN
0278-0380,1558-7991
Volume
38
Issue
2
First Page
1
Last Page
26
Digital Object Identifier (DOI)
10.2308/ajpt-52243