How Do Investors Respond to Disclosure of Audit Quality Indicators?
School of Accountancy
Both U.S. and international standard setters have sponsored initiatives to develop a reliable portfolio of audit quality indicators (AQIs). We conduct two experiments to examine how investors respond to receiving auditor-disclosed AQIs. We find that investors experience a stronger negative affective reaction toward the auditors when receiving a negative-trending AQI portfolio compared to receiving a positive trend of AQIs or when no AQIs are disclosed. In turn, investors receiving a negative-trending AQI portfolio are less likely to support auditor ratification and choose to voluntarily decrease their investment in the company. Results also indicate that including additional qualitative context within the disclosure increases investor support for auditor ratification when accompanying a positive-trending AQI portfolio but has no additional effect on investor decision-making for a negative-trending AQI portfolio. Our findings help to advance the dialogue on AQIs and suggest a possible path forward for disseminating AQIs to interested stakeholders.
AUDITING: A Journal of Practice & Theory
Digital Object Identifier (DOI)