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Study: Auditors Who Issue Reports Critical of Management Face Negative Perception

A recent academic study examines whether the audit market penalizes auditors for reporting information that is critical of management directly to investors through the issuance of certain audit opinions. According to the study, audit offices that issue internal control material weakness opinions (ICMWs) experienced an overall decrease in future client and fee growth even from clients receiving a clean internal control opinion. Audit clients at greater risk of receiving ICMWs were found to avoid auditors with a reputation for issuing ICMWs and to select an office that issues fewer ICMWs, the study found. The authors document that on average, for every additional ICMW issued, an audit office experiences 2.2 percent lower client growth and 6.1 percent lower fee growth over the next year, suggesting that auditors who issue an ICMW are perceived as less attractive in the audit market and indicating that the issuance of an ICMW affects auditor selection and retention decisions even among clients that do not receive an ICMW. The authors assert their results indicate that this penalization of auditors “undermines the value of direct-to-investor auditor communications and provides insight into the longer-term implications of the recently enacted expanded auditor’s report.” Meanwhile, audit committee members may find helpful a new blog focusing on corporate auditing and accounting firm developments and providing commentary on sustainability disclosures and PCAOB guidance.

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