In the realm of accounting and finance, the choice of auditor and its impact on the transparency and quality of financial reporting is a pivotal concern for both academics and practitioners. The study by Karel Hrazdil, Dan A. Simunic, and Nattavut Suwanyangyuan, published in the Journal of Accounting, Auditing & Finance, sheds light on this critical issue. Their research uncovers how the selection of a Big 4 auditor, as opposed to a non-Big 4 auditor, significantly enhances the informativeness of 10-K annual reports for shareholders. This study goes beyond the conventional understanding of an auditor’s role, suggesting that auditors contribute substantially to the financial reporting process, affecting not just the attestations of financial statements but also the volume and quality of disclosures in 10-K reports.
The researchers found that clients who opt for Big 4 auditors—PwC, EY, KPMG, and Deloitte—tend to have 10-K reports with greater disclosure volume. This finding is especially pronounced for companies grappling with higher information asymmetry and poorer accrual quality. The study introduces an innovative approach by using the unexplained portion of 10-K length as a proxy for audit firm effort, revealing that more extensive disclosures are linked to higher audit fees and longer audit report lags. This correlation suggests a higher audit effort, underlining the fact that financial reporting quality is a joint outcome of the efforts from both company managers and their auditors.
By highlighting the enhanced disclosure provided by Big 4 auditors, the study makes significant contributions to the understanding of how auditor choice influences corporate disclosure practices. It fills a crucial gap in the literature on textual analysis of corporate disclosures and responds to regulatory concerns regarding the depth and clarity of corporate financial reporting. Given the increasing demand for detailed disclosures, this research offers valuable insights for regulators, companies, and investors aiming to understand the dynamics of auditor choice and its implications on financial reporting quality.