Consequences of the Expanded Audit Report for Small and High-risk Companies: Evidence from the United Kingdom’s Alternative Investment Market

Abstract

We investigate the consequences of adopting the expanded audit report for companies in the United Kingdom’s Alternative Investment Market (AIM) after July 2017. We examine the incremental informativeness of annual reports and the cost and quality of audits. AIM companies have a relatively poor information environment and their investors may especially benefit from new disclosures provided by the auditor. However, we only find a marginal increase in market reaction (i.e., abnormal trading volume) to AIM companies’ annual reports, and this finding is highly sensitive to how we measure market reaction. Next, we do not find evidence of incremental changes in the cost or quality of audits. Finally, we do not find consistent evidence that report length, number of risks, and materiality are incrementally associated with our outcomes of interest. Our results suggest that, on average, the expanded report had relatively little impact on the information environment of small and high-risk companies in the AIM.

Keywords: AIM, audit report, key audit matters, abnormal returns, trading volume, audit fees, discretionary accruals