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The unintended consequences of uncertainty disclosures made by auditors and managers on nonprofessional investor judgments

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  • Kelton, Andrea Seaton
  • Montague, Norma R.

Abstract

We examine how recent proposals requiring augmented auditor and management disclosures highlighting estimate uncertainty influence investors' judgments and decisions. Specifically, we investigate the effects of auditor emphasis of matter (EOM) paragraphs, both independently and in combination with management disclosures of estimate ranges, on investors' likelihoods to invest. Using an experiment with nonprofessional investor participants, we find that the EOM has the unintended consequence of increasing investors' perceptions of management credibility, leading to higher likelihood of investment. Furthermore, despite the ability of ranges to highlight uncertainty and downside risk, we find that management's disclosure of an estimate range does not impact the positive effect of the EOM on investors' propensities to invest, unless management provides a wide range. In this circumstance, we find that a wide range mitigates the positive influence of the EOM on investment decisions. Our results have important implications for regulators, preparers, and users of financial statements as we find that augmented auditor and management reporting may have unintended consequences on investor perceptions of management credibility and resultant investment decisions.

Suggested Citation

  • Kelton, Andrea Seaton & Montague, Norma R., 2018. "The unintended consequences of uncertainty disclosures made by auditors and managers on nonprofessional investor judgments," Accounting, Organizations and Society, Elsevier, vol. 65(C), pages 44-55.
    • Handle: RePEc:eee:aosoci:v:65:y:2018:i:c:p:44-55
    DOI: 10.1016/j.aos.2017.10.001
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    Cited by:

    1. Ayca Zeynep Suer, 2021. "Review of Critical Accounting Estimates in the Context of Key Audit Matters," Muhasebe Enstitusu Dergisi - Journal of Accounting Institute, Istanbul University Business School, vol. 0(65), pages 23-37, July.
    2. Rowe, Stephen P., 2019. "Auditors’ comfort with uncertain estimates: More evidence is not always better," Accounting, Organizations and Society, Elsevier, vol. 76(C), pages 1-11.
    3. Sau Yu Ong & Robyn Moroney & Xinning Xiao, 2022. "How do key audit matter characteristics combine to impact financial statement understandability?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 805-835, March.
    4. William D. Brink & Karen De Meyst & Tim V. Eaton, 2022. "The Impact of Human Rights Reporting and Presentation Formats on Non-Professional Investors’ Perceptions and Intentions to Invest," Sustainability, MDPI, vol. 14(4), pages 1-25, February.
    5. Ma, Jin & Coram, Paul & Troshani, Indrit, 2024. "The effect of key audit matters and management disclosures on auditors’ judgements and decisions: An exploratory study," The British Accounting Review, Elsevier, vol. 56(2).
    6. Koonce, Lisa & Mongold, Cassie & Quaid, Laura & White, Brian J., 2024. "Experimental research on standard-setting issues in financial reporting," Accounting, Organizations and Society, Elsevier, vol. 112(C).

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    More about this item

    Keywords

    Range disclosure; Estimation uncertainty; Audit report; Emphasis of matter; Credibility;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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