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Title: Annual report readability and the audit function
Author: Altass, Sultan Mohammad O.
ISNI:       0000 0004 5918 5302
Awarding Body: University of Leeds
Current Institution: University of Leeds
Date of Award: 2016
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Drawing on agency theory and obfuscation hypothesis, the main focus of this thesis is on the readability of annual reports. It comprises three empirical chapters which examine the readability of annual report and the possible association with the audit function. The effect of auditing on the lexical content of annual report, is to be studied in three different, yet interrelated, auditing topics, namely, audit fees, audit firm tenure, and auditor switching. The results in the first empirical chapter which investigates the association between annual reports readability and audit fees suggests that audit fees is highly statistically associated with the readability of the annual report and this association holds after controlling for different firm specific and financial characteristics. This suggests that high levels of audit fees, measured as fees paid for statutory audit services, may partially explain the quality of the annual report. Contrary to expectations, there is little evidence that non-audit fees, measured as the fees paid for consultancy and other services, have an effect on the readability of the annual report. Nevertheless, this chapter documents a strong statistical association which indicates that total audit fees, measured as the sum of audit and non-audit fees, can capture the economic bond between auditing firms and client management and that higher levels of total audit fees have negative effects on readability. Moreover, I document strong joint relationship between the three measures of fees and firm performance affecting annual report readability and that these interactions show that audit, non-audit and total fees exhibit greater effects in poorly performing firms. The second empirical chapter which investigates the association between the readability of annual reports and audit firm tenure suggests that audit firm tenure has a statistically significant relationship with the readability of annual reports and that longer tenure has a negative relationship with readability. Moreover, I document that, on average, the effect of audit tenure is stronger when the levels of audit fees are low. Finally, the analysis shows that the relationship between audit firm tenure and readability is relatively stronger in firms with weaker solvency levels. The third empirical chapter investigates the association between the readability of annual reports and auditor switching. The analysis suggests that the relationship between annual report readability and auditor switching in general is insignificant. However, after including the interaction term of switching and performance, the regression analysis suggests that when well performing firms switch their auditor they are more likely to disclose difficult-to-read annual report. Moreover, the mitigating effects of audit fees is insignificant in altering the relationship between switching and readability. The interactive relationship between switching and tenure is highly significant which indicates that, within this context, the effect of switching on readability is negative and that this relationship becomes stronger as the tenure increases. In other words, those firms with longer audit tenure are more likely to produce difficult-to-read annual reports than short-tenured clients. Moreover, the analysis of the short-term effects of switching suggests a negative and highly significant relationship between short-term switching and readability. This indicates that switching firms discloses difficult-to-read annual reports during the three years following auditor switching. Similarly, the regression results of the association between annual report readability and auditor switching within a five-year window (long-term) come in line with expectations, the relationship is highly significant and the sign is negative. This implies that firms that switch their auditor will have difficult-to-read annual reports within five years following the switch. However, it has been documented in the analysis that the effect of switching is stronger over a five-year window than short-term (that is three years following the auditor switching), which signifies delayed switching effects on readability. In both models, the mitigating effects of firm performance and audit tenure are statistically significant. In summary, the findings of this thesis suggest that firms utilise the readability of annual report, and that such practice depends on the audit function. Regulators are urged to examine the impact of client/auditor relationship and its influence on the quality of annual report.
Supervisor: Keasey, Kevin ; Clacher, Iain Sponsor: Saudi Ministry of Education
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available