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The effects of audit quality disclosure on audit effort and investment efficiency

Publication ,  Journal Article
Chen, Q; Jiang, X; Zhang, Y
Published in: Accounting Review
January 1, 2019

We develop a model to evaluate the costs and benefits of disclosing information about audit quality. Specifically, we examine whether audit quality disclosure affects auditors' effort and investors' investment efficiency. In our setting, an auditor exerts unobservable effort to influence audit quality and is motivated by liability in the event of audit failure. The usefulness of audited financial reports for investors depends on both the quality of the underlying financial reporting (e.g., as embodied by GAAP) and the quality of auditors' reports (i.e., the likelihood with which audit evidence uncovers managerial misreporting). We show that audit quality disclosure increases auditors' effort incentives if and only if the underlying financial reporting quality is relatively weak. We also show that such disclosure can actually reduce investment efficiency. Our analyses contribute to the debate about policies aimed at improving audit transparency.

Duke Scholars

Published In

Accounting Review

DOI

ISSN

0001-4826

Publication Date

January 1, 2019

Volume

94

Issue

4

Start / End Page

189 / 214

Related Subject Headings

  • Accounting
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1501 Accounting, Auditing and Accountability
 

Citation

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Chen, Q., Jiang, X., & Zhang, Y. (2019). The effects of audit quality disclosure on audit effort and investment efficiency. Accounting Review, 94(4), 189–214. https://doi.org/10.2308/accr-52286
Chen, Q., X. Jiang, and Y. Zhang. “The effects of audit quality disclosure on audit effort and investment efficiency.” Accounting Review 94, no. 4 (January 1, 2019): 189–214. https://doi.org/10.2308/accr-52286.
Chen Q, Jiang X, Zhang Y. The effects of audit quality disclosure on audit effort and investment efficiency. Accounting Review. 2019 Jan 1;94(4):189–214.
Chen, Q., et al. “The effects of audit quality disclosure on audit effort and investment efficiency.” Accounting Review, vol. 94, no. 4, Jan. 2019, pp. 189–214. Scopus, doi:10.2308/accr-52286.
Chen Q, Jiang X, Zhang Y. The effects of audit quality disclosure on audit effort and investment efficiency. Accounting Review. 2019 Jan 1;94(4):189–214.

Published In

Accounting Review

DOI

ISSN

0001-4826

Publication Date

January 1, 2019

Volume

94

Issue

4

Start / End Page

189 / 214

Related Subject Headings

  • Accounting
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1501 Accounting, Auditing and Accountability