Are disclosed auditor materiality thresholds informative of firms’ earnings quality? – Evidence from the revised ISA 700 audit report

• Main Authors: GOH, Beng Wee, LEE, Kiat Bee Jimmy, LI, Na, LI, Dan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Materiality threshold; Audit report; Earnings quality; Accounting
• Online Access: https://ink.library.smu.edu.sg/soa_research/1767; https://ink.library.smu.edu.sg/context/soa_research/article/2794/viewcontent/Are_disclosed_auditor_materiality_thresholds_informative_of_firms_earnings_quality_20180507.pdf
• Institution: Singapore Management University

Under the Financial ReportingCouncil’s presumption that mandating new disclosure requirement in the auditreport would provide information useful to investors, we examine whether theauditor disclosed materiality threshold is associated with the firm’s earningsquality. We document that a lower threshold of materiality level is associatedwith a higher earnings quality, as measured by lower discretionary accruals,higher accruals quality, and less earnings smoothing. We also find someevidence that the negative association between auditor disclosed materialitythreshold and earnings quality is more pronounced when the auditor is moreindependent, when management’s incentive to manage earnings is higher, and whenthere is lower information uncertainty. Overall, our results are useful toinvestors who rely on the new audit report disclosures to gain insights intothe audit process and more importantly to infer the quality of the firm’sreported earnings. Our results could also be relevant to regulators, such asthe PCAOB and IAASB, who are contemplating whether to impose similarmateriality threshold disclosure requirements in audit reports.