Perceiving Auditors’ Tone

The expanded audit reporting model requires auditors to disclose both risks of material misstatements in the risk section and how they address such risks in the response section in key audit matter (KAM) disclosures. Using hand-collected audit report data from the United Kingdom, I investigate whether investors and analysts find the response tone with communicative value. First, I find that the response tone, but not the risk tone, is significantly associated with audit quality (proxied by lower likelihood of future restatements, lower abnormal audit fees, and longer audit report lag). Next, I find that both investors and analysts view the response tone with communicative value. Moreover, the cross-sectional test results reveal that the association between the response tone and investor or analyst reactions is stronger when there is less available firm-specific information, or when auditors are perceived to be more credible. These findings suggest that the response tone conveys auditors’ sentiment regarding the audit quality, enabling financial statement users to assess the value of audits more effectively.