Investigating the usefulness of audit firm transparency reports in increasing investors’ confidence and auditors competition. A Europe-wide analysis

Purpose – This paper aims to discover whether the information included in the Transparency Report (TR) are different depending on the country in which they are disclosed. The paper also analyses whether TRs affect the level of investor confidence in the Public Interest Entities (PIEs) which are clients of the audit firms and whether TRs promote the competition within the audit market. Design/Methodology/Approach – On the basis of a content analysis, a Transparency Report Disclosure Index (TRDI) is calculated for a sample of 122 auditing firms from 10 European countries over the period 2010-2011, in order to discover the key determinants of the TRDI and the value of their information. Cost of equity is used to assess the investor confidence in the PIEs; the audit market competition is evaluated by means of the number of audit clients gained and lost after the issuance of the TR. Findings – Despite attempts at harmonizing audit practice across the EU, results confirm the role of the institutional context factor in explaining differences among European countries. Moreover, while the TRDI reveals that TR does improve investor confidence, no evidence has been found that the new disclosure requirement affected audit market concentration. Research limitations/implications – Limitations of the study are associated to the short-term period analysed to investigate the TRDI effect on audit market competition. Originality/value – The study provides an analysis of the audit firm transparency based on the information disclosed in TRs and it proposes the use of TR for achieving market competition strategies