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The impact of the precision of accounting standards on the expanded auditor’s report in the European Union

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  • Pinto, Inês
  • Morais, Ana Isabel
  • Quick, Reiner

Abstract

One of the most important recent expansions of the auditor’s report within the European Union, but also in the International Standards on Auditing, is the mandatory disclosure of key audit matters (KAMs). This paper investigates whether or not the likelihood of a KAM depends upon the level of precision and detail of an accounting standard. We use the Rules-Based Characteristics (RBC) score of Mergenthaler (2009) validated in Donelson, McInnies, and Mergenthaler (2012) to determine whether an accounting standard is more precise, i.e., whether the accounting standard is more rules-based. We also analyze the impact of accounting standard precision on the readability of the auditor’s report. The sample consists of FTSE 100 (UK), CAC 40 (France), and AEX 25 (Netherlands) companies that disclosed KAMs in 2016. The findings show that the probability of a KAM increases with more precise accounting standards. Our results also show that the disclosure of KAMs that are based on accounting standards with higher rules-based characteristics decreases the readability of auditors’ reports. This paper contributes to the literature by showing how accounting standard precision interacts with the auditor’s report from the point of view of the preparer (auditor) and of the user of the report.

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  • Pinto, Inês & Morais, Ana Isabel & Quick, Reiner, 2020. "The impact of the precision of accounting standards on the expanded auditor’s report in the European Union," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:jiaata:v:40:y:2020:i:c:s1061951820300343
    DOI: 10.1016/j.intaccaudtax.2020.100333
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    4. Lin, Hsiao-Lun & Yen, Ai-Ru, 2022. "Auditor rotation, key audit matter disclosures, and financial reporting quality," Advances in accounting, Elsevier, vol. 57(C).

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