Consequences of Changing the Auditor’s Report: Early Evidence from the UK

The audit regulator in the United Kingdom and Ireland, the Financial Reporting Council, has required significant changes to the auditor’s report for large public companies with fiscal years starting October 1, 2012. The new report describes the most significant risks of material misstatement, audit materiality, and audit scope. We investigate the one-year effect of the new report in terms of the cost of audits, audit quality, and investors’ reaction to the report’s filing. We examine new report adopter and non-adopter companies around the regulatory cut-off. The new report resulted in a pre-post adoption increment in audit fees of approximately seven percent for adopter companies, compared to non-adopter companies. However, we do not find evidence that the new report had a one-year effect on audit quality or investors’ reaction. Further examining the content of the new reports, we find that the report’s length and the number of risks are positively associated with audit fees; the materiality amount is negatively associated with audit quality; and, the investor’s reaction is positively associated with the number of risks and the materiality amount. Our results are relevant for the PCAOB and IAASB, as well as for researchers and practitioners interested in the auditor’s report content.