eBook Edition: 2017

We examine the effects of disclosing information about audit quality on auditors’ effort provision and investors’ investment efficiency. In our setting, the usefulness of an audited financial report for investors depends both on the quality of the underlying financial reporting (e.g., as embodied by GAAP) and the quality of auditors’ reports (i.e., the likelihood audit evidence uncovers managerial misreporting). An auditor exerts an unobservable effort to influence audit quality and is motivated by liability in the event of an audit failure. We show that the effects of audit quality disclosure depend on the underlying quality of financial reporting and the argument for audit quality disclosure to motivate auditors’ effort can be supported when the underlying Financial reporting quality is relatively weak. Our analyses contribute to the debate about the costs and benefits of policies aimed at improving audit transparency and offer a potential explanation for cross-country differences in auditor disclosure requirements. (From Author)

eBook Contents

Introduction – The Model - Optimal investment

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