The Effects of Auditor Disclosures Regarding Management Estimates on Financial Statement Users' Perceptions and Investments

Download or read book The Effects of Auditor Disclosures Regarding Management Estimates on Financial Statement Users' Perceptions and Investments written by Marcus Doxey and published by . This book was released on 2015 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.