Abstract
Using a "natural experiment'''' provided by a change in Canadian auditing standards requiring an emphasis of matter paragraph in the auditor''s report (GC-EOM) when the financial statements include a going concern uncertainty disclosure (GC-FS), this paper examines the incremental investor reaction to the auditor''s report over the related GC-FS. Conditioning on the linguistic severity of the GC-FS (weak and severe), we first document a negative price response to severe but not to weak GC-FS before the regulatory change. This implies that investors react to financial statement disclosures and account for their degree of interpretability in the absence of a GC-EOM. When the uncertainty disclosure is accompanied by a GC-EOM, we find incremental negative abnormal returns and lower abnormal trading volume only for weak GC-FS. Collectively, these findings imply that an emphasis of matter paragraph in the auditor''s report can have incremental value to investors.
Original language | English |
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Pages (from-to) | 27-55 |
Number of pages | 29 |
Journal | Auditing-a Journal of Practice & Theory |
Volume | 38 |
Issue number | 2 |
DOIs | |
Publication status | Published - May 2019 |
Keywords
- going concern
- auditor's report
- emphasis of matter paragraph
- perceived financial reporting quality
- ANNUAL EARNINGS ANNOUNCEMENTS
- GOING-CONCERN OPINIONS
- TRADING VOLUME
- INFORMATION-CONTENT
- DISCLOSURE
- UNCERTAINTY
- FEES
- INDEPENDENCE
- VALUATION
- RETURNS