How Do Nonprofessional Investors Respond to Disclosure of Audit Quality Indicators?
Owen Brown and Velina Popova
Coles Working Paper Series, FALL17-03, November 2017
Overview Both US and international standard setters have sponsored initiatives to develop a reliable portfolio of audit quality indicators (AQIs). Their primary goal is to provide new insights into how to evaluate audit quality and, critically, how to achieve high-quality audits. We designed an experiment to determine how nonprofessional investors, a primary beneficiary of the financial reporting process, respond to auditor-disclosed AQIs. Participants received quantitative information about either a positive or negative trend in the AQI data, and in some cases, auditors added a qualitative contextual narrative. We found that investors receiving a positive-trending AQI portfolio were more favorably disposed toward the auditor and more likely to ratify the selection of their company’s auditor and voluntarily increase their equity investment in the company than those who received negative-trending portfolios. In addition, a positive-trending AQI portfolio had more influence on investor decisionmaking when accompanied by a qualitative discussion about context. Our findings should interest regulators and standard setters as they consider how to advance the dialogue on AQIs and the best way to disseminate AQI data.
30 | Working Papers
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