The Impact Of Disclosing Auditor Independence And Tenure On Non-Professional Investor Judgment And Decision-Making

This study experimentally investigates how disclosing both the auditor’s obligation to remain independent of its client and auditor tenure in the audit report influence non-professional investors’ judgments and decision-making, especially the decision about whether to invest in a particular auditee. In the Auditor’s Reporting Model (ARM) proposal, the Public Company Accounting Oversight Board (PCAOB) asserts that inclusion of additional information in the audit report will improve the informativeness of the audit report for investors and as a result will modify its relevance to investment decisions. Using an experiment, I find that these disclosures positively influence non-professional investor judgments of auditor attributes – specifically auditor independence and auditor competence. Further, I note that the disclosures augment judgments of auditor credibility and audit quality as well as the report’s perceived informativeness. I also find that the disclosure of long tenure has a significant positive effect on consequent investment decisions. The findings of this study are important to informing regulators on how reform to the audit report increases report readers’ sensitivity to the perceptions of the financial statement auditor, which ultimately influences non-professional investor decision-making