Background & Motivation
  • Regulatory Background
     –FRC (reporting periods ending on or after 30th Sep, 2013, 
       for entities that report on application of the UK 
       Corporate Governance Code)
     –PCAOB, IAASB, and EC
     –Disclose the most significant audit matters in that year’s 
       financial statement audit, using non-standardised 
       language.
  • These enhanced reporting standards are intended to make 
     audit reports more transparent as they induce 
     differentiations among auditor reports (PCAOB 2016).
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    Background & Motivation
  • The use of tailored, non-standardized language when 
    discussing material risks of the audited entity is key 
    to achieving the objectives of EARs (FRC, 2013; 
    IAASB, 2013; PCAOB, 2013)
  • We examine how the use of standardized disclosures 
    in EARs relates to audit quality at the engagement 
    level (after adjusting for the industry-based 
    comparability effects)
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   Research Approach
   • Textual similarities of EARs are expected to be 
      negatively associated with audit quality
      –Generic disclosures may be intentionally chosen 
        by auditors to reduce transparency 
      –Standardized language may be a consequence 
        of deficiencies in audit effort or competence
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   Research Approach
   • The UK’s first three implementation years (from 30/09/2013 
     to 30/09/2016)
   • The textual similarities of EARs are measured using the Vector 
     Space Model (VSM). 
      –Mean scores of that EAR relative to each of the other EARs 
        issued by the same audit firm in each year. 
      –KAM sub-sections & full EARs
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    Findings
    • EAR similarity scores are negatively associated with 
      audit quality, measured as abnormal accruals and 
      abnormal audit fees.
    • The relation is more significant when examining 
      KAM sub-sections, compared to the analysis of full 
      EARs.
    • Our results suggest that, on average, engagements 
      with higher audit quality result in more transparent 
      EARs. 
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