Are auditors involved in preparing the financial reports of the firms they audit?
Final Report Abstract
In this study, we analyze the extent to which audit partners influence the management reports and notes in their clients' financial reports. Using a sample of more than 3 million firm-pairs of private and publicly listed firms from Germany, we find that the similarity of management reports and notes is higher when two clients have the same audit partner. Specifically, we find that similarity of wording in management reports (notes) increases by 30 (48) percent, similarity of content increases by 29 (49) percent, and similarity of structure increases by 48 (121) percent. In addition, we find that the influence of audit partners is nine times higher than when clients are merely audited by the same audit firm, but by different audit partners. Similarly, the influence of audit partners is four times higher than when clients are audited only by the same office of an audit firm, but by different audit partners. We show that the influence of audit partners not only leads to more standard phrases in management reports and notes, but also to more client-specific information being reported. Finally, interviews with audit partners show that clients usually prepare an initial draft of the management report and notes, and that audit partners successively influence their content during the audit in order to ensure legal compliance. Our study is also relevant for users of annual financial reports. As our results show, management reports that are strongly influenced by audit partners tend to be of higher quality, for example, in terms of fewer redundancies and more forward-looking information. Furthermore, these reports seem to be more useful for addressees in predicting the future profitability of client firms. Overall, this study complements previous research, which has already shown that audit firms have a certain influence on their clients' management reports and notes. Our results show that audit partners, in particular, shape the design of management reports and notes, and that this influence has significant consequences for the quality of these reports. Thereby, this study provides new insights into the role of auditing for the narrative elements of annual financial reports, an important, but largely unexplored area. Additionally, by using a better controlled research design compared to previous studies, our study confirms the findings of prior research on the relevance of auditors for their clients’ financial reports.
Publications
- The role of individual audit partners for narrative disclosures. Review of Accounting Studies
Christoph Mauritz, Martin Nienhaus, and Christopher Oehler
(See online at https://doi.org/10.1007/s11142-021-09634-4)
