Extended audit reporting: Evidence from the Gulf Cooperation Council (GCC)

Abstract

Extended Audit Reporting (EAR) is an emerging area of research within the domain of auditing, and it represents the most significant change in the structure of audit reports over the past 70 years. Key Audit Matter (KAM) represents a form of EAR mandated by the International Auditing and Assurance Standards Board via the International Standard of Auditing 701. This thesis comprises three essays that examine EAR and KAM. The first essay is a systematic literature review (SLR) of EAR that synthesises and extends the current literature. It further provides a rigorous review of recent additions to auditing requirements. The second and third essays are cross-country research studies that examine the effect of the unique attributes of the six Gulf Cooperation Council (GCC) countries on KAM, using a unique dataset collected manually during the 2016–2021 period for non-financial firms listed on GCC stock exchanges. The first essay offers a comprehensive systematic review of EAR. It synthesises and extends the current knowledge through an integrative framework of this recent auditing development by exploring eight aspects of EAR. The review includes 156 articles published between 2014-2023 and structured according to the economic context and methodology of the studies to facilitate novel insights. The analysis shows that developed countries document mixed findings regarding the communicative value of EAR and its market effects. Developing countries, conversely, report informativeness and market reactions. Both report a decline in earnings management behaviour and an improvement in the quality of financial reporting. Most studies report that the attributes of audit committees, external auditors, and audited companies influence EAR disclosure, as do accounting standards precision and auditing standards clarity. Several opportunities are provided for future research to reconcile and extend past research, thereby filling existing gaps. The second essay uses agency theory to examine the relationship between ownership structure (royal, family, and foreign) and board director type (royal, family, and foreign) with the external auditor reporting of KAMs. The results provide strong evidence that royal ownership decreases KAM disclosure, whereas family and foreign ownerships increase disclosure. The study also found that royal board directors reduce the number of disclosed KAMs, suggesting that external auditors consider power and status when determining KAMs. By contrast, foreign board directors increase KAM disclosure, possibly to address information asymmetry due to geographic separation between the principal and agents. The study found no evidence of an association between family directors and KAM reporting. The third essay investigates the relationship between audit partner tenure and KAM reporting and whether Hofstede’s cultural dimensions affect this relationship. Hogarth's (1980) decision-behaviour theory is applied to examine the influence of tenure on partner judgement and KAM disclosure decisions. The results provide strong evidence that partner tenure is positively associated with KAMs disclosures. The study also found that long-tenured partners disclose KAMs in more detail and produce more readable audit reports, and interestingly, long-tenured auditors tend towards boilerplate reporting. The findings on the effect of Hofstede culture moderators suggest that the relationship between partner tenure and KAMs is relatively strong when power distance and uncertainty avoidance are moderating factors, and relatively weak when individualism is considered. This study extends and contributes to the EAR literature in several ways. First, to the best of the author’s knowledge, this thesis presents cross-country evidence of KAM disclosures in six GCC countries for the first time. Second, this thesis offers the first evidence of the effect of the unique characteristics of the Gulf region (ownership structure and board directorship) on KAM reporting. Third, this thesis provides unprecedented evidence for the effect of audit partner tenure on KAM reporting. Fourth, this study provides the first evidence of how national cultural values, using Hofstede's cultural dimensions, can influence the behaviour of long-tenured partners’ KAM reporting.