Do Reviews by External Auditors Improve the Information Content of Interim Financial Statements?

Kajüter P, Klassmann F, Nienhaus M


Abstract
In the last decades, regulators around the world have increasingly mandated stricter assurance requirements for interim reporting. In several countries, firms must have their interim financial statements reviewed by an external auditor. However, there is little evidence to indicate whether auditor assurance is desirable for interim financial statements. We address this gap and analyze whether investors care about a review of interim financial statements. By exploiting a setting in which firms can voluntarily decide to buy a review, we find that the publication of reviewed interim financial statements causes more abnormal return volatility as well as abnormal trading volume than the publication of un-reviewed interim financial statements. Additional analyses reveal that the increase in information content is largely driven by a signaling effect of the review rather than by an increase in earnings quality. The findings inform the current political debate of mandating reviews for interim financial statements in several jurisdictions.



Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
Published

Year
2016

Journal
The International Journal of Accounting

Volume
51

Issue
1

Start page
23

End page
50

Language
English