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Optimistic tone and audit fees: some Australian evidence

journal contribution
posted on 2019-07-01, 00:00 authored by Vincent Bicudo de CastroVincent Bicudo de Castro, Ferdinand GulFerdinand Gul, Mohammad MuttakinMohammad Muttakin, Dessalegn Mihret
We examine whether the tone of corporate annual reports is associated with audit pricing decisions. A unique dataset drawn from annual reports of nonfinancial firms listed on the Australian Stock Exchange for the period from 2002 to 2014 is generated using textual analysis. We find that annual reports that convey optimistic tone are associated with lower audit fees, suggesting that annual report tone reflects factors that auditors consider in assessing audit risk. Consistent with the inverse association between tone and audit fees, results of additional analysis show that annual report tone is positively associated with earnings quality. Our results hold after controlling for firm characteristics that influence audit pricing decisions and remain robust to alternative variable measurement and test of endogeneity. Overall, the findings suggest that auditors could enhance their audit risk assessment practices by systematically considering linguistic attributes of qualitative corporate disclosures.

History

Journal

International journal of auditing

Volume

23

Issue

2

Pagination

352 - 364

Publisher

John Wiley & Sons

Location

Chichester, Eng.

ISSN

1090-6738

eISSN

1099-1123

Language

eng

Publication classification

C1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2019, John Wiley & Sons Ltd