Expanded auditor’s report: do differences between men and women lead to another quality in key audit matters?

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Expanded auditor’s report: do differences between

men and women lead to another quality in key audit

matters?

A research to the relation between the percentage of women in the audit committee and the frequency of audit committee meetings on the quality of key audit matters mentioned in the expanded auditor report.

Abstract

This research examines the influence of the percentage women in the audit committee on the quality of the key audit matters mentioned in the expanded auditor report and the effect of the frequency of audit committee meetings on this relation. The research is focusing on the financial statements and auditor reports of UK companies linked to the FTSE 100 or the FTSE 250 and on Dutch companies linked to the AEX in 2015. There is established that women in the audit committee do not affect the quality of the key audit matters and that the frequency of audit committee meeting does not has an impact on this relation.

Master thesis MSc Accountancy

Rijksuniversiteit Groningen – Faculty Economics and Business Economics

Kim Deelstra s2314010

k.deelstra.2@student.rug.nl

Mentor: Prof. Dr. D.A. de Waard Date: 24/5/2017

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2.4 Gender diversity ... 15 2.5 Hypothesis development ... 16 3. Research Design ... 18 3.1 Sample ... 18 3.2 Dependent variable ... 19 3.3 Independent variables ... 20 3.4 Control variables ... 20 3.5 Methods ... 22 4. Results ... 23 4.1 Dataset ... 23 4.2 Descriptive statistics ... 23 4.3 Correlation analyses ... 25 4.4 Results hypothesis 1 ... 25 4.5 Results hypothesis 2 ... 27

5. Conclusion and discussion ... 30

5.1 Conclusion and discussion ... 30

5.2 Limitations and future research ... 31

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2 7. Appendixes ... 41 Appendix 1: UK companies included in the sample ... 41 Appendix 2: Dutch companies included in the sample ... 43

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1. Introduction

This chapter will introduce the main subject of this research. First there will be an introduction of the subject and an explanation of the importance of this research is made. Subsequent, the relevance of the subject will be illustrated.

1.1 Introduction

The annual report is already read poorly and the auditor’s report is read the most poorly of all. “Is de nieuwe, uitgebreide controleverklaring een succes of niet?” is asked at the end of 2015 in the Dutch magazine de Accountant (2015). This is a Dutch article about the debate which is following the outcomes of a research of the NBA1, the professional body for accountants in the Netherlands. This research concerns the expanded auditor’s report. They have examined to which extent the auditor’s reports met the requirements of the new regulation around the auditor’s report (NBA, 2015). An important part of this research, which is also stated in the article mentioned above, is the number and nature of the key audit matters (KAMs). These KAMs have to be mentioned in the expanded auditor’s report with the purpose to give the users of the financial statement some extra information, and to decrease the information asymmetry. From the 77 tested auditor’s reports, 40 times the goodwill is mentioned as KAM. Next to this one, there are some other KAMs which are mentioned very often in the researched auditor’s reports. When there are only mentioned some general KAMs, which can be mentioned in the audit outcomes of every company, and no specific enterprise KAMs, in which way are the purposes of the expanded auditor’s report met and in how far does this affect the quality of the expanded auditor’s report?

Audits provide a guarantee to all who have a financial interest in companies (Cadbury Report, 1992). The auditor judges whether the financial statement representation of the company is true and fair in accordance with the accounting framework which is nationally accepted. The information in the auditor’s report is of interest to the public, financial statement users and academia (Zdolsek, Jagric & Odar, 2015). Looking at the auditor’s report in the Netherlands, as response to the legislative changes around ‘deskundigenonderzoek’ in Section 9, the NBA published a revised ISA2 720 within NV COS3 (De Accountant, 2016). The revised ISA 720 contains some changes around the Opinion in the Independent Auditor’s report. ISA 720

1_{The NBA, Nederlandse Beroepsorganisatie voor Accountants, is the professional body for accountants in the}

Netherlands (https://www.nba.nl/).

2_{In full is an ISA an International Standard on Auditing, drafted by the IAASB (}4_).

3_{The NV COS, Nadere voorschriftencontrole- en overige standaarden, is the auditing regulation and other}

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4 includes the responsibilities of the accountant regarding other information (IAASB4, 2015a). Another standard, ISA 701, additionally requires the communication of the KAMs within the auditor’s report of the independent auditor. This obligation must be applied to the auditor’s report for listed entities (IAASB, 2015b). By providing a greater transparency about the audit performed, the communication of the KAMs has to enhance the communicative value of the auditor’s report. Communicating the KAMs gives the users of the financial statements some additional information to understand the most significant matters which appeared during the audit of the financial statements in the current period (IAASB, 2015b). Not only in the Netherlands the laws and regulations around the auditor’s report have changed, also the UK is at the forefront of the new regulation concerning the auditor’s report. Review of the FRC5 (2016) shows that investors greatly value the enhanced information the expanded auditor’s report provides, but they do feel that more could still be done to enhance the auditor’s report. For instance, they would prefer greater transparency about the assumptions of the company’s management (FRC, 2016).

Another key finding revealed in the review called above is that the close alignment between Audit Committee reporting and the auditor’s reports continuous. The impact of the requirement of the additional information, obligated by ISA 701, has been the beginning of a more steady dialogue between the auditors, investors and audit committee (FRC, 2016). The audit committee is established to increase the quality of the financial information and the efficiency of the corporate governance (Ho & Wong, 2001). Besides that, the presence of an audit committee in an organisation ensures higher information transparency (Wang, Lee & Chuang, 2015). Other evidence shows a positive relation between the presence of an audit committee and the frequency of audit committee meeting and audit quality (Goodwin-Stewart & Kent, 2006). Besides that, prior research suggests that more frequent audit committee meetings ensure that it is more likely that the audit committee is more informed of current auditing issues and is more focused to fulfil its duties (Mat Yasin & Puat Nelson, 2012). It seems that the audit committees use different approaches concerning the expanded auditor’s report. One uses a more active and engaged oversight, another appears to be restricted to receiving and reviewing reports from the company’s management (KMPG, 2014).

4_{IAASB is the International Auditing and Assurance Standards Board, an independent standard-setting body}

that serves the public interest by setting high quality international standards for auditing, assurance, and other related areas, and by facilitating their adoption and implementation (https://www.iaasb.org/).

5_{The FRC is the Financial Reporting Council, they are the UK’s independent regulator responsible for promoting}

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5 There are several factors which can affect the communication within organisations. This can be an explanation for the different approaches used by the audit committees. Upadhyay & Zeng (2014) found that the presence of woman provides a better transparency of the company. A northern newspaper in the Netherlands dedicated a special edition around the differences between men and women last February. One of the articles began with the following: “Vrouwen zijn gevoeliger, kunnen meer tegelijk, laten ruzies langer door sudderen, zijn instabieler, stressgevoelig, roddelen meer. Vooroordelen? Nee. Het klopt allemaal. Laten we er dus maar rekening mee houden.” (Taffijn, 2017). However, gender diversity has largely been ignored in the accounting and auditing literature (Ittonen, Miettinen & Vähämaa, 2010). This study is focusing on the differences between men and woman in the audit committee. The purpose of this study is to find out in which way the diversity in the audit committee influences the quality of the expanded auditor’s report. The focus will be on the following research question:

What is the impact of the percentage of women in the audit committee on the quality of the key audit matters mentioned in the expanded auditor’s report and how is this influenced by the frequency of the audit committee meetings?

To answer this question, a few sub-questions are stated:

1) What is an auditor’s report and what has changed in the expanded auditor’s report? 2) What are the key audit matters which have to be included in the expanded auditor’s

report?

3) What is an audit committee and what is its function?

4) How can the differences between men and woman influence an organisation?

1.2 Relevance

In the past years, there have been several studies on audit quality but, in my knowledge, there has not been many research to the quality of the auditor’s report. DeAngelo (1981) studied the relation between auditor size and audit quality, Francis (2004) asked himself what we know about audit quality and Van Buuren & Wong (2016) reviewed a paper which focused on the correlation between the regulatory enforcement style and its perceived impact on audit quality. The auditor’s report is the outcome of the audit itself. In order to determine the audit quality, the FRC (2015a) used the application of the new requirements of the auditor’s report

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6 in their inspections. There is a high probability that the quality of the audit is associated with the quality of the auditor’s report.

This study can be seen as relevant through the relative recent developments in the field of the auditor’s report. The IAASB standards only require the new regulation around the auditor’s report from the financial year 2016 (NBA, 2014). The UK and the Netherlands run ahead of this regulation and implemented the extended auditor’s report on a voluntary base first in 2013. There have not been many studies, while the requirements do not apply internationally. In the UK and the Netherlands research concerning the extended auditor’s report is limited. There have been some government researches concerning the content of the auditor’s report and exploring if the new requirements are all included. Bos & Strating (2014) show that the expanded auditor’s report is already used widely, despite the voluntary base of the regulation. The extension of the auditor’s report is added with the meaning to narrow the expectation gap, which can be explained as the difference between what audits achieve and what is thought that they (should) achieve, and to give the users of the financial statements more useful information. One of the biggest changes, like mentioned before, are the KAMs. The quality of the KAMs and the factors which influence this quality, are an important subject of research for society.

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2. Theoretical Framework

The expanded auditor’s report was only required by regulation in the UK and in the Netherlands till 2016. In this respect they both run ahead to the new IAASB standards which require the extension of the auditor’s report only from the financial year 2016 (NBA, 2014). Since 2016 there is also a requirement for the expanded auditor’s report in all other parts of the world, with the exception of the US. Since the expanded auditor’s report is required for just a few years, there has not been loads of research on this subject. Below are the agency, stewardship and stakeholder theory explained and after this the functions of the auditor’s report and earlier research are illustrated. Finally, more information is given about the audit committee and gender diversity.

2.1 Theories

There are two important theories underlying the auditor’s report and the new requirements of the auditor’s report. The first is the agency theory, which focuses on the principle-agent relation which exist through the separation between ownership and management. Besides that, the agency theory has a strong focus on self-interest in decision making (Fama & Jensen, 1983). The second theory used in this study, is the stakeholder theory. This theory contains the relationships of an organization with several stakeholders in society (Guthrie, Petty & Ricceri, 2006). An, Davey & Eggleton (2011) say that the theories are complementing theories which are, when looking at reporting issues, best used combined. Another theory worth mentioning, is the stewardship theory. The stewardship theory is the opposite of the agency theory, this theory is more focused on trust and collaboration between principal and agent (Tacoma, Buse & Bilimoria, 2016).

2.1.1 Agency Theory

The agency theory arises when the principal and the agent have different interests. Looking at this study, the shareholders can be seen as principals and the manager is the agent in this relationship. There are two problems that can happen within this relation. The first problem can arise when the principle and the agent do not have the same interests or goals and when it is difficult or expensive for the principal to verify what the agent is really doing. It is for the principal not possible to verify that the agent behave appropriately. The second problem arises when the principal and the agent have different attitudes against risks. Through the different risk preferences, they prefer different actions (Eisenhardt, 1989).

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8 Jensen (1983) distinguishes two lines of development of the agency theory: positivist and principal-agent. The contract between the principal and the agent is a common unit of analysis (Eisenhardt, 1989). Studies within the positivist agency theory focused on the identification of situations where it is likely for the principal and agent to have conflicting goals. The studies describe the governance mechanisms which limit the self-serving behaviour of the agent. It is less mathematical than principal-agent agent research. Next to this, the principal-agent agency theory mostly focuses on the relation between owners and managers of large, public organisations (Berle & Means, 1932).

Like shortly mentioned earlier, a strong focus of the agency theory is on self-interest. Much of organizational life is based on self-interest. The agency theory makes specific contributions to organizational thinking. Treatment of information is the first, the benefits are weighed against the costs of the information. Another implication is the risk implications of the agency theory. Organizations have uncertain futures but this uncertainty is showed in terms of risk trade-offs and not only in terms of inability to preplan. The willingness to accept risks will influence the relation between principal and agent (Eisenhardt, 1989).

The expanded auditor’s report has as propose to reduce the information asymmetry between the manager and the shareholders. By providing more information about the performed audit in the auditor’s report, the users will see the audit and the financial statements as more reliable. Especially by disclosing information in the form of the KAMs, the users of the financial statement will have more knowledge about the information given in the financial statements. In this research the KAMs are higher in quality when they are more company specific. The more company specific and less general KAMs are mentioned in the auditor’s report, the higher the information value of the disclosed information. When the information value of the disclosed KAMs is higher, the agency problem will reduce.

2.1.2 Stewardship Theory

The stewardship theory makes the assumption, other than the agency theory, that trust and collaboration, rather than control and distrust, exists between the principal and the agent, partly through their high identification with the organisation. The stewardship theory says that the agent will act in the best interest of the principal, even when this is not in line with their own interest. When they do, they will achieve higher personal outcomes of affiliation, self-actualization and achievement (Tacoma, Buse & Bilimoria, 2016; Van Puyvelde, Caers, Du Bois & Jegers, 2012). The stewardship theory does not explain the development of the

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9 expanded auditor report, but can be used to explain why the differences between men and women in the audit committee can affect the quality of the KAMs. Men have self-interest and conflicting interests, where women think more about their own responsibilities towards the shareholders. The differences between men and women will be explained broader in paragraph 2.4 about gender diversity. The agency theory represents subordinates as opportunistic, individualistic, and self-serving, this can be linked to the behaviour of men. The stewardship theory represent subordinates as pro-organizational, collectivists, and trustworthy (Davis, Schoorman & Donaldson, 1997). This theory is more linked to the behaviour of women.

2.1.3 Stakeholder Theory

Next to the agency theory, the stakeholder theory is an important reason for the development of the expanded auditor’s report. The stakeholders theory correlates to the relations of an organisation with several stakeholders in the environment. From this perspective, the goals of the organisation have to relate to the interest of the stakeholders (An, Davey & Eggleton, 2011). Freeman (1984) is seen as the creator of the stakeholder theory. He defines the stakeholders as “any group or individual who can affect or is affected by the achievement of the activities of an organization” (Freeman, 1984, p.46). The stakeholder theory generates value and describes the operations of a firm as an instrument for all stakeholders to become better after time (Freeman, Harisson & Wicks, 2007). The agency theory is more focused on the shareholders, where the stakeholders theory also takes the interest of other groups who have something to do with the organization. Stakeholders include stockholders, managers, creditors, employees, customers, local communities, suppliers and the general public (Hill & Jones, 1992).

In explaining the expanded auditor’s report, both the stakeholder and the agency theory have to be understood. Where the agency theory only includes the interests of the shareholders, the stakeholder theory has a more broader view. However, the stakeholder theory does not include the information asymmetry, which is a very important driver for the expanded auditor’s report (An, Davey & Eggleton, 2011). The expanded auditor’s report does offer extra information for the stakeholders and not only for the shareholders. This information can be used to make future decisions for, for instance, suppliers and customers. Also society can use the information, they can conclude how the organisation influences their environment and community.

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2.2 Auditor’s report

2.2.1 Auditor’s report

Through the several accounting scandals caused by the conflict of interest in the relationship between the owner and managers of organisations, it was necessary to establish rules to regulate the actions of all the parties involved within an organisation. To take care of an enhanced credibility and transparency of the financial information, different corporate governance codes were issued in Europe in the nineties (Sierra García, Ruiz Brabadillo & Orta Pérez, 2012). One of these codes is the Cadbury Report in UK which is founded in 1992. In this Report, the annual audit is seen as one of the cornerstones of corporate governance. They say that “the audit provides an external and objective check on the way in which the financial statements have been prepared and presented, and it is an essential part of the checks and balances required. The question is not whether there should be an audit, but how to ensure its objectivity and effectiveness.” (Cadbury Report, 1992).

The Cadbury Report (1992) addressed several ways to increase the effectiveness and value of the audit. One way, an essential first step, is to narrow the ‘expectation gap’. This is explained as the difference between what audits do achieve, and what is thought they achieve, or should achieve. Besides that, an effective internal control system is seen as an essential part of efficient management of a company. They recommend that the accountancy profession should take lead in for instance the development of a set criteria to assess the effectiveness.

The final point of the work of the financial auditors is the Independent Auditor’s Report. The report must comply with the rules about their form and content like stated in the International Standards on Accounting (ISA) (Hategan, Grigorescu, Nitu-Antonie, Sirhi & Iacobuta, 2015). It is very important to look at the need for ensuring the mandatory transparency demands which are requested by the law (Albu & Mateescu, 2014). The auditor’s report is used through investors to make sound judgements about the financial statement. Besides that, the basic function is to reduce the agency costs (Boolaky & Quick, 2016). The information asymmetry can be reduced through the auditor by providing additional information to the principal. Currently, the auditor’s report is short and standardized (Zenzerovic & Valic-Vale, 2016). The auditor states an opinion on whether the financial statement does not contain material misstatements and gives this opinion with reasonable assurance (IAASB, 2015c).

The results of Czerney, Schmidt & Thompson (2014) suggest that the auditor’s reports nowadays communicate information about the financial reporting quality. However, several

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11 incidents leaded to a more critical look from society at the auditor’s report. This is why a Dutch group, which is concerned with the future of the accountancy business investigated how the auditor’s report can be improved (FA Rendement, 2015). Bos and Strating (2014) also stated that the discussion around the expectation gap accelerated through the financial crisis. An important part of this expectation gap is the difference between the quantity and quality of on one side the information which gives an user of the auditor’s report comfort in taking decisions. On the other side of the expectation gap, there is the factual information disclosed in the form of the annual statement and the auditor’s report (IAASB, 2011). The report of Bos and Strating (2014) proposed some improvements to increase the quality of the auditor. Even in 2011 the opportunities to decrease the information gap were recognized. This could be done through report about the most important business and control risks, the auditor’s judgment about estimations and some other additional information (IAASB, 2011).

2.2.2 Expanded auditor’s report

Since a few years, the UK and the Netherlands have a regulation which requires auditors to compose a new, more expanded auditor’s report. Some significant changes, based on the recommendations made by IAASB (2011), are made within this new auditor’s report. The main objective for these changes is to enhance the informational value and relevance of the auditor’s reports. Providing greater transparency about the performed audit in the auditor’s report will result in an enhanced confidence in the audit and the financial statements. This is in public interest (IAASB, 2015d). Next to the increased transparency and enhanced information value of the auditor’s report, the IAASB (2015d) believes that the changes will also enhance the communication, increase the attention to the disclosure and renew the focus of the auditor on the matters which have be reported. The most important changed requirements regarding the expanded auditor’s report are set out below (NBA, 2014):

- New section to communicate the key audit matters (KAMs); - Disclosure of the name of the engagement partner;

- The opinion section has to be presented first; - Enhanced auditor’s reporting on going concern; - Identification and explanation of the materiality.

The motives for the changes mentioned above can also be seen as narrowing the expectation gap (Boolaky & Quick, 2016). The Casburty Report (1992) also mentions the problem of the expectation gap as reason why the financial statements of an organisation have to be audited.

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12 Many users of the financial statement have other expectations of what an audit provides. They need more information about the auditor, the audit performed and the financial statements (Mock et al., 2013).

The UK is precursor regarding the international regulation concerning the expanded auditor’s report. They already had the requirements regarding the expanded auditor’s report from the annual reports of 2013. Their commitments are going beyond the IAASB recommendations. In the Netherlands are the developments not going as fast as in the UK, but they do walk ahead to the international regulation (Bos & Strating, 2014). The requirements called above are for both of the countries largely corresponding.

Two government organisations, one of the UK and one of the Netherlands, did some research on the functioning of the expanded auditor’s report. The Financial Reporting Council is a government organisation in the UK and has prepared an report which gives a review of the experience with the expanded auditor’s report. In this report they explain some innovations which have been made by the audit firms within the auditor’s report. Next to this, something is said about the impact of the auditor’s report and the content of the auditor’s report in which the Big 4 companies are compared (FRC, 2016). The NBA, a Dutch government organisation, gave an insight in the content of the expanded auditor’s reports in the Netherlands. This report explains in which extent all of the required elements are in the expanded auditor’s reports (NBA, 2015).

Besides the government researches there is limited published research known around the expanded auditor’s report. Valic-Vale and Zenzerovic (2016) linked the explanatory paragraph in the expanded auditor’s report to differentiate companies which experience financial difficulties from those that are not. Bos & Strating (2014) explored the first experiences in practice in the Netherlands and the UK. In the Netherlands there appears to be a positive take up of the expanded auditor’s report, even when there was no obligation to report in the new manner and there was no attendance of a final standard. Empirical research in the UK shows similar results. Both of the researches also show that several KAMs are mentioned more often than others, examples are impairments, taxes, provisions and revenue recognition (Bos & Strating, 2014). Looking at the added value of the new auditor’s report, Bos & Strating (2014) expect that it is only a matter of time till internationally will be asked for further extensions of the auditor’s report.

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2.2.3 Key Audit Matters

Communicating KAMs is required to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed. It gives the intended users of the financial statements additional information about the matters which, as seen by the auditor’s professional judgment, were the most significant in the audit of the current period. The communication of the KAMs may provide intended users a basis to further engage with management and those charged with governance (IAASB, 2015d).

The description of a KAM has to contain why the matter was considered to be significant in the audit and being determined as KAM, how the matter was addressed in the audit and a reference to the related disclosure. This description has to mention some other aspects, or a combination of the following aspects (IAASB, 2015d):

- The most relevant aspects of the auditor’s response or approach regarding to the matter or specific to the assessed risk of material statement;

- Brief overview of the procedures performed;

- An indication of the outcome of the auditor’s procedures; - Key observations with respect to the matter.

Adding the KAMs to the auditor’s report is the most important change made in the expanded auditor’s report. The KAMs include specific information concerning the organisation. IAASB expects that the auditor will discuss particular problems which occurred during the audit or circumstances which made the auditor change the audit approaches. In practice this can be sensitive, maybe even price-sensitive, information (Bos & Strating, 2014). Looking at the KAMs, it seems that auditors have a strong focus on balance sheet items. The riskiness of issues like continuity and reliability of IT systems and meet the regulations are recognized by many companies, but are rarely mentioned as KAM in the auditor’s reports (Brouwer, Eimers & Langendijk, 2016). Results from an experimental research of Sirois, Bédard and Bera (2017) show that the communication of the KAMs does have effect on the direct attention, but it may also act as substitute for reading the financial statements.

2.3 Audit Committee

2.3.1 Audit Committee

The independent variables in this research are the audit committee and the frequency of the audit committee meetings. These variables are chosen because the audit committee is one of the elements which is responsible for controlling the interests of the shareholders and it is

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14 supervising the financial statements. It should enhance the efficiency and thereby the audit committee should provide maximum transparency (Davidson, Goodwin-Stewart & Kent, 2005).

In Europe the large companies did not have to form audit committees until the 1990s. After the publication of different codes of good comparative governance, this changed. Usually it is recommended that audit committee exists of external or non-executive directors and that it should be dominated by independent members (De Andres Suarez, Cabal Garcia, Fernandez Mendez & Rodriguez Gutierrez, 2013).

According to Karim, Robin and Suh (2016) the audit committee is a critical player in financial reporting and possibly one of the most important board committees. The audit committee has to hire and fire the auditors. Furthermore they have to determine the terms of the engagement. In their research they indicate that it is useful to understand how the actions of the audit committee are influenced by the characteristics of the committee. They investigated in which extent the audit fees are influenced by the audit committee and board characteristics (Karim, Robin & Suh, 2016). In their study they refer to several other researches in line of the audit committee characteristics, such as the research of Carcello, Hermanson, and Ye (2011). Other studies say that the credibility and reliability of financial statements are improved by the formation of an audit committee (Auerbach, 1973; FCCG, 1999). The independence of the audit committee would enhance the auditor independence and improve the transparency in financial reporting (Lam, 1976). Next to this, De Andres Suarez et al. (2013) point out that when the audit committee is effectively facilitating the labour of the external auditor, the auditor’s opinion about the financial statements should be improved.

Besides the changes concerning the new auditor’s report, the organisation also has some additional requirements about what and in which way they have to report. They now have to report some key financial reporting issues and risks of material misstatement. This can be compared with the regulation which is associated with the new auditor’s report. The disclosure of these information could increase the professional scepticism used by the audit committee (IAASB, 2013), what could lead to an improvement in audit quality (Reid, Carcello, Li & Neal, 2015).

According to Cohen, Krishnamoorthy and Wright (2002), when the senior auditors do not have the required knowledge about the corporate governance within the organisation, this can significantly change the quality of both the audit and the financial reporting. This also applies

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15 to the understanding of the audit committee and in which way the auditor can use the work performed by the audit committee. ISA 610 (IAASB, 2009a) describes the requirements which must be met while using the work of the internal audit function within the organisation. The relationship between the auditor and the audit committee is described in two ways. Besides that the objectives of both relationships are different, some of the ways in which these objectives are achieved may be the same. Next to this, when using the work performed by the audit committee, the auditor do has the sole responsibility for the published audit opinion. Before using specific work of the internal auditors, the external auditor has to evaluate and perform audit procedures on that work. By doing so, the auditor has to determine its adequacy for his purposes (IAASB, 2009a). The interrelations between various actors in corporate governance are crucial to achieving high quality financial reporting (Cohen, Krishnamoorthy & Wright, 2008). This includes the interrelation between the audit committee and the auditor. Earlier research focuses mainly on the selection of the auditor in combination with the characteristics of the audit committee (Abbott & Parker, 2000) or what drives this selection (Almer, Philbrick & Rupley, 2014). Other recent research is more focused on the relation between the audit committee and the audit fee (Loukil, 2014).

2.3.2 Audit Committee meetings

One of the characteristics which is included in several researches about the activities of the audit committee, and also the second independent variable in this research, is the frequency of audit committee meetings. In some of these studies, a positive relationship between the frequency in audit committee meetings and the quality of the accounting information of the firm is shown (Xie, Davidson & Dadalt, 2003; Abbott, Parker & Peters, 2004; Li, Mangena & Pike, 2012). De Andres Suarez et al. (2013) confirm this relation, their research concludes that the frequency of meetings of the audit committee positively influences the financial statement quality. Research in Belgium pointed out a negative relationship between the frequency of audit committee meetings and earnings management. The absence of earnings management suggests higher financial quality (De Vlaminck & Sarens, 2015). This would also mean that the audit committee frequency will have a positively effect on the financial quality.

2.4 Gender diversity

Like mentioned in the introduction, gender diversity has largely been ignored in the accounting and auditing literature (Ittonen, Miettinen & Vähämaa, 2010). However, other corporate finance literature noted that gender diversity may have important implication for

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16 corporate governance (Carter, Simkins & Simpson, 2003). Results from research of Ittonen, Miettinen & Vähäma (2010) are broadly in line with the assertion that the diversity in gender may lead to improvements in the effectiveness and monitoring activities of the audit committee. In their research there are some more gender differences mentioned concerning corporate governance functions. For instance, women communicate and listen more efficiently. This is why women tend to perform better than men in group problem-solving and decision-making tasks (Dallas, 2002).

The differences between men and woman become mostly visible in a stressful situation, when we are thrown back on our instincts. These instincts are also a component of why there are more men than woman in the top positions, woman are more uncertain in taking important decisions and taking big risks. This does not mean that woman are inferior managers. Regularly, because they are good listeners without giving any advice immediately, women are good managers (Taffijn, 2017).

Other than the accounting and auditing literature, other literature did pay attention to gender diversity. The study of Kim & Starks (2016) shows that gender diversity improves firm value and that woman bring unique skills to corporate boards. Other studies found that gender diverse boards are linked to higher quality sustainability reports (Al-Shaer & Zaman, 2016) and that gender diversity enhances economic performance (Augustine, Wheat, Jones Baraldi & Malgwi, 2016).

Like already mentioned in the theories paragraph, expected is that men act more in the line of the agency theory. They act in their own interest and behave opportunistic and individualistic. On the other hand, women are expected to act in line of the stewardship theory. They act in the interest of the organization and behave collectivistic and trustworthy (Davis, Schoorman & Donaldson, 1997).

2.5 Hypothesis development

Like mentioned in the theory above, there are several differences between men and women and in their way of working. Women differ of men in ways of communication style, personality and have different priorities (Liao, Luo & Tang, 2015; Adams & Funk, 2012). Besides that, they are more stakeholder oriented and tend to have more trust-building relationships than men and thus have more incentives to minimize the agency problems (Gul, Hutchinson & Lai, 2013). This could mean that women are more likely to share and disclose information which men should not share as fast. The assumption that gender diversity does

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17 affect the activities and behaviour of the audit committee, is further supported by other research. Bear, Rahman & Post (2010) provide evidence of a link between corporate social responsibility and gender diversity. Diversity in gender can lead to improvements in the effectiveness and monitoring activities of the audit committee (Ittonen et al., 2010).

FRC (2016) experienced that there is a close alignment between the audit committee, the financial statements and the external auditor. Karim, Robin and Suh (2016) supplement this, and say that it is useful to understand how the actions of the audit committee are influenced by the characteristics of the committee. There are two duties which the regulator has assigned to the audit committee, these are the oversee of the financial reporting and the external auditors. The audit committee is required to be actively involved in the cooperation with external auditors, but the external auditors carries greater responsibility for reliable financial reporting (Dobija, 2015).

The intertwined activities of the audit committee and the external auditors and the differences in characteristics between men and women, along with the KAMs which can be seen as ‘end product’ of the external auditor, leaded to the following hypothesis:

Hypothesis 1: The percentage of women in the audit committee has a positive influence on the quality of the key audit matters in the expanded auditor’s report.

Next to this, several researches concluded that the frequency of the audit committee meetings positively affects the activities of the audit committee (Xie et al., 2003; Abbott et al., 2004; Li et al., 2012) and thus also the oversee of the external auditors. This study assumes that a higher frequency of audit committee meetings, and thus better or stricter oversight of the audit committee at the external auditor, affects the relation of the first hypothesis. This information leaded to the second hypothesis:

Hypothesis 2: The frequency of audit committee meetings has a positive influence on the relation between the women in the audit committee and the quality of the expanded auditor’s report.

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3. Research Design

To test the established hypotheses, an empirical research is performed. Below is described how this research will be done. There will be started with a description of the sample. After this the variables used in this study are described. Table 1 on page 22 shows a brief oversight of the variables used to investigate the hypotheses.

3.1 Sample

The data used in the study will be extracted from the Financial Statement of the companies and the expanded auditor’s reports. The companies used in the sample are the companies linked to the FTSE 100, this are the 100 companies of the London Stock Exchange with the highest market capitalisation. Next to these companies, the top 100 of the FTSE 250, 70 additional companies linked to the London Stock Exchange and 75 Dutch listed companies are taken into the sample. The companies are selected based on their market value in January 2015. The sample included the data from the years 2013 to 2015. For this study, only the data from 2015 is included because the companies got the chance to get used to the new regulation by then. When only including 2015, the sample included 327 companies. Excluding double observations, because some Dutch listed companies are also listed in the UK, leaded to 73 Dutch listed companies. Besides the double observations, there are also excluded 29 companies from which there is no information or not enough information available about the audit committee and another 13 companies are excluded because there is no information available about the used materiality during the audit, which is one of the control variables in this research. Eventually 283 companies are included in the sample, 230 English listed companies and 53 Dutch listed companies.

In this study, the choice is made to only include listed companies. The expanded auditor’s report can be applied by companies which are not listed, but is only required for listed companies in the UK. In the Netherlands, the expanded auditor’s report is required for all public interest entities. The UK and the Netherlands are walking ahead to the international regulations regarding the auditor’s report, that is why there is only data included of this two countries. Chosen is to use the data of 2015. The companies and audit firms did have some time to implement the expanded auditor’s report, so we think that the KAMs are higher in quality than in the first one or two years where both parties had to get used to the additional requirements of the auditor’s report. Appendix 1 contains a list with the included companies from the UK, Appendix 2 contains a list with the included companies from the Netherlands.

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3.2 Dependent variable

Quality of the KAMs mentioned in the expanded auditor’s report

The dependent variable which is central in this study, is the quality of the KAMs mentioned in the expanded auditor’s report (QKAMj). Like earlier mentioned, the auditors have to communicate KAMs in the auditor’s report. They have to mention the most relevant matters concerning the performed audit and the key observations with respect to the matter (IAASB, 2015b). Chen, Miao & Shevlin (2015) constructed a new measure for disclosure quality. This measure is based on earlier research which shows that finer information is of higher quality (Blackwell, 1951). In this study, this approach is taken to measure the quality of the KAMs. The quality of these KAMs will be measured by classify the KAMs into several groups. This study assumes that the most specific information provides the finest information. The more general the information, the less fine is the information. That is why the following groups are chosen to measure the quality of the KAMs: entity specific, sector specific and general KAMs.

Next to the regulation concerning the KAMs in the expanded auditor’s report, ISA 240 contains some regulation about composing significant risks during the audit. Management override and revenue recognition are mandatory classified as significant risks (IAASB, 2009b). However, these significant risks are often mentioned as KAMs, while this is not the intention of the FRC (FRC, 2016). That is why there is made a separate group: fraud risks. This group does not include other fraud risk, to minimize the subjectivity in the assessment of the risks.

The quality of the KAMs is measured by classifying them in several groups. Because this study assumes that the more enterprise specific the KAM is, the higher the quality is. When the KAM is enterprise specific, thus when the KAM only can be mentioned in the auditor’s report of this particular organisation, the KAM gets a score of 3. A sector specific KAM, this means that the KAM can be mentioned in almost every auditor’s report of companies within the same sector, is getting a score of 2. When there is a general KAM mentioned in the auditor’s report, which can be mentioned by almost every organisation, gets the KAM a score of 1. There will be a separate group for the fraud risks management override and revenue recognition, but these KAMs will also be measured at the same scale. The final score will be calculated by the average score of the KAMs mentioned in the auditor report. A total score, which included the fraud risks, is calculated, but there are also calculated two separate final scores.

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3.3 Independent variables

Diversity audit committee

Diversity in the audit committee of organisation j (DIVj) is being expressed as the percentage of woman in the audit committee. The choice to only look at the relation between men and women has been made because in the theoretical part of this thesis already has been found that there are several significant differences between men and women. In the dataset, we do have the information about how many members the audit committee has and how many of the members are men. This variable can be calculated by the following:

( ) = ℎ − ℎ

ℎ Audit committee meetings

The moderating variable in this study is the frequency of audit committee meetings of organisation j (FREQj). In the theoretical part is mentioned that several studies show a relation between the quality of the activities of the audit committees and the frequency in audit committee meetings. In this research, this variable will be measured by the total of audit committee meetings for an organisation in 2015.

3.4 Control variables

In this study, the influence of audit committee diversity on the quality of the KAMs mentioned in the expanded auditor’s report is determined. Additional is measured whether the frequency of audit committee meetings has a positive influence on this relation. The included independent variables are not the only variables which are in relation with the dependent variable, that is why there is controlled for company size (SIZEj), industry (INDj), and materiality (MATj).

Company size

The first factor we use as control variable, is company size (SIZEj). Previous research shows that bigger firms publish longer and more complex annual reports (Li, 2008) and that the company size has a positive influence on audit quality (Watts & Zimmerman, 1990), like the auditor’s report. We assume that this could lead to more cases which need special attention during the audit. This should lead to more and more specific KAMs in the auditor’s report. The company size will be measured through a logarithm of each firm’s assets (Eisenberg, Sundrgren & Wells, 1998).

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21 Industry

Next to the company size, we control for the industry in which the firm operates (INDj). There seems to be significant reporting differences between industries (Suttipun, 2012). Companies in the financial sector use to have more risks than other companies. The quantity of risk disclosure is influenced by the industry of the company (Beretta & Bozzolan, 2004). Research of the Financial Reporting Council showed that several of the risks mentioned in the risk section of the annual report correspond with the KAMs mentioned in the auditor’s report (FRC, 2015b). The classification used to divide the companies in the industries, is the Industry Classification Benchmark (ICB). This is launched in 2005 by Dow Jones and FTSE and used to segregate markets into industries. Literature shows that ICB is consistent across all sectors and ICB appears to be a good way to classify firms in different sectors (Vermorken, 2011). In order to determine the industry, the major sector from Orbis is used. Materiality

The last control variable used in this study, is the used materiality (MATj). Next to the KAMs, the used materiality must be mentioned in the expanded auditor’s report. The materiality is the threshold for the extent of the audit. With a lower materiality, the auditors have to see more information than when there is a higher materiality and thus the chance to discover specific information concerning considerable subjects during the audit is higher. This study assumes that a lower materiality leads to more specific KAMs in the auditor’s report. Just like the company size, is the materiality measured by a logarithm of the materiality used while performing the audit.

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3.5 Methods Table 1: oversight variables

Variable Explanation Measurement level

Dependent variable QKAM

Quality of the KAMs, measured on a scale with entity specific (3), sector specific (2) and general (1) KAMs. With a separate

measurement for fraud risks. Ratio

Independent variables

DIV Diversity Audit Committee, measured by the percentage of _{woman in the AC.} Ratio FREQ Frequency AC meetings, measured by the total of AC meetings in _{the investigated year.} Ratio Control variables

SIZE Company size, measured by a logarithm of each firm’s assets. Ratio IND Industry, measured through the Industry Classification _{Benchmark (ISB).} Nominal MAT Materiality, measured by a logarithm of the materiality used for _{the audit.} Ratio

The table above has given an oversight of the variables used in this study. Because this is a quantitative research, the hypotheses are tested by statistical tests. We compare the observed values with what we expected to find. A multiple regression is used to test the influence of diversity in the audit committee and the frequency of audit committee meetings on the quality of the KAMs. The regression model used, is the following:

= + + + + +

In this formula is the constant, are the various coefficients from this study and is the disturbance term.

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4. Results

This chapter contains the results of the conducted research. First the dataset is further explained, after which the descriptive statistics are presented. In the following paragraphs the correlation analysis and the results of the hypotheses are explained.

4.1 Dataset

Before doing the analysis in this research, there have been made some adjustments within the data. The financial data of the Dutch companies is showed in Euros, except three which are presented in US dollar or already in pounds, where the UK companies is shown in pounds. The total assets and used materiality are converted to pounds using the exchange rate on 31-12-2015.

Besides this, there are some extreme outliers within the control variables size and materiality, these outliers has been stripped out of the data. The outliers are replaced by a value of three times the standard deviation from the mean of the variable. After this is the logarithm of the variables size and materiality taken.

There has also been a correlation analysis to see if the two variables concerning the quality of the KAMs may be combined. Through the information we have about the mandatory fraud risks, the KAMs concerning fraud and the other KAMs are measured separately. From this analysis seems that there is no correlation between both risks (p=0,33). Because of this are the quality of the KAMs concerning the mandatory fraud risks and quality of the other KAMs tested separately.

4.2 Descriptive statistics

In this paragraph some information about the variables used in this research is given. From the 283 companies, the quality of the normal KAMs has an average of 1.76, where the average of the quality of the KAMs concerning the mandatory fraud risks is 0.58. It seems that the mandatory fraud risks are much less specific than the other KAMs. The standard deviation of the KAMs concerning the fraud risks is also higher than the standard deviation of the other KAMs. This could mean that overall there is more difference in the quality of the KAMs concerning the mandatory KAMs than in the quality of the other KAMs.

Table 2 shows several differences between the number of woman in the audit committee and the frequency of the audit committee meetings. The most audit committees, 91, have four meetings during a year. The vast majority audit committees, around 80%, have between the

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24 three and six meetings a year. Besides that, it is remarkable that almost 80% of the audit committees exist for less than half of women. There is only one audit committee which exist of women completely, where 66 audit committees contain only men.

Table 2: Descriptive Statistics

Variable N Mean Std. Deviation Minimum Maximum

Dependent variable QKAM (normal) 283 1,76 0,59 0 3 QKAM (fraud) 283 0,58 0,73 0 3 Independent variables DIV 283 0,28 0,20 0 1 FREQ 283 4,72 1,71 0 13 Control variables SIZE 283 £ 42.481.987.006 £ 187.024.330.162 £ 1.828.314 £ 2.409.660.000.000 MAT 283 £ 47.688.004 £ 118.710.737 £ 370.000 £ 1.200.000.000

The control variable industry is not presented in the table above. This is an nominal variable, what makes it not possible to give information about the mean, standard deviation, the minimum and the maximum. Below is the descriptive statistics for this variable explained. The most companies (103) are part of the Consumer Services industry, after this industry the most companies (78) are established in the Financials industry. The least companies (2) are located in the Technology industry. The table below, Table 3, gives some additional information about the industries in which the companies are located.

Table 3: Descriptive statistics industries

Industry Frequency Percent Cumulative

Oil & Gas 6 2,1 2,1

Basic Materials 23 8,1 10,2 Industrials 19 6,7 17,0 Consumer Goods 103 36,4 53,4 Health Care 8 2,8 56,2 Consumer Services 30 10,6 66,8 Telecommunications 7 2,5 69,3 Utilities 7 2,5 71,7 Financials 78 27,6 99,3 Technology 2 0,7 100,0 Total 283 100,0

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4.3 Correlation analyses

To test the correlation between the variables, a Pearson correlation test is done. The results of this test are presented in Table 4. The test shows if there is any multicollinearity between the variables. This could affect the outcomes of the regression analysis which will be used to test the hypothesis and would so reduce the reliability of the results.

Table 4: Pearson Correlation test

When the correlation value is higher than 0,8 or lower than -0,8, there is multicollinearity. Based on the table above there can be determined that there is a multicollinearity between the (logarithm of) total assets and the (logarithm of) materiality. A logical explanation for the high correlation between both, is that the materiality can be based on elements like the total assets (IAASB, 2016). For this reason, and because of the variables being control variables, are both variables still taken into further analyses.

4.4 Results hypothesis 1

The first hypotheses predicts a positive relation between the amount of women in the audit committee and the quality of the KAMs. Like mentioned earlier, is the dependent variable measured by two variables. The hypotheses are tested by doing the same test twice, but with another dependent variable. To test the first hypothesis, a regression model is used. The first hypothesis is the following:

Hypothesis 1: The percentage of women in the audit committee has a positive influence on the quality of the key audit matters in the expanded auditor’s report.

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26 The relation described in the hypotheses is presented in a scatter plot, showed in Figure 2 and Figure 1. Every round is standing for a company with their KAM quality and the percentage women in the audit committee.

Looking at the plots above, it does not seem that there will be any relation between the quality of the KAMs and the percentage of women in the audit committee. The companies with the quality of their KAMs and the percentage of women in the audit committee are random divided and are not near the linear relation between both. To test the first hypothesis, we did a linear regression analysis. The outcomes are presented in Table 5 on the next page.

Model 1 and model 2 present the results out the linear regression analysis of the quality of the KAMs including other information than the mandatory fraud risks. Model 3 and model 4 show the results of the linear regression of the quality of the KAMs, which only concern the mandatory fraud risks.

Based on the models can be determined that there are no significant relations between any of the tested variables. There is no significant relationship between the percentage of women in the audit committee and the quality of the normal KAMs, B = -0,08, p > 0,001. Next to this, there is also no significant relationship between the percentage of women in the audit committee and the quality of the KAMs concerning the mandatory fraud risks, B = -0,03, p>0,001. This means that the first hypothesis can be rejected.

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Table 5: Regression results hypothesis 1

4.5 Results hypothesis 2

The second hypothesis includes the influence of the frequency of audit committee meetings on the positive relation between the percentage of women in the audit committee and the quality of the KAMs. This hypothesis will also be tested through a regression analysis. The second hypothesis is presented below:

Hypothesis 2: The frequency of audit committee meetings has a positive influence on the relation between the women in the audit committee and the quality of the expanded auditor’s report.

This hypothesis includes a moderating variable. To test this, the dependent variables are standardized and a new variable is created. Table 6 presents the results from the regression analysis on the quality of the normal KAMs, where

Model 1 Model 2 Model 3

Control variables H2 (normal KAMs) H2 (normal KAMs)

Step and variables B SE B SE B SE

Intercept 1,57 ** (0,45) 1,47 ** (0,52) 1,55 ** (0,52) Control Materiality (log) -,06 (0,05) -,06 (0,05) -,06 (0,05) Size (log) 0,06 (0,04) 0,06 (0,04) 0,05 (0,04) Industry 0,00 (0,00) 0,00 (0,00) 0,00 (0,00) Main effects

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28 % Female AC -,02 (0,04) -,01 (0,04) Frequency AC meetings -,01 (0,04) 0,00 (0,04)

Two-way interaction

% Female AC x Freq. AC Meetings -.06 (0,04)

Δ R Square 0,01 0,01 0,02

** Significant at the 1% level

Table 7 shows the results from the regression analysis on the quality of the KAMs concerning the mandatory fraud risks.

Based on Table 6 can be determined that there is no significant interaction between the percentage of female in the audit committee and the frequency of audit committee meetings on the quality of the normal KAMs, B = -0,06, p > 0,001. There is also no significant interaction between the percentage of female in the audit committee and the frequency of audit committee meetings on the quality of the KAMs regarding the mandatory fraud risks, B = 0,01, p > 0,01. This means that also the second hypothesis has to be rejected.

Table 6: Results regression hypothesis 2 (normal KAMs)

Control variables H2 (normal KAMs) H2 (normal KAMs)

Intercept 1,57 ** (0,45) 1,47 ** (0,52) 1,55 ** (0,52) Control Materiality (log) -,06 (0,05) -,06 (0,05) -,06 (0,05) Size (log) 0,06 (0,04) 0,06 (0,04) 0,05 (0,04) Industry 0,00 (0,00) 0,00 (0,00) 0,00 (0,00) Main effects % Female AC -,02 (0,04) -,01 (0,04) Frequency AC meetings -,01 (0,04) 0,00 (0,04) Two-way interaction

% Female AC x Freq. AC Meetings -.06 (0,04)

Δ R Square 0,01 0,01 0,02

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Table 7: Results regression hypothesis 2 (fraud KAMs)

Control

variables H2 (fraud KAMs) H2 (fraud KAMs)

Intercept 0,37 (0,56) 0,48 (0,64) 0,466 (0,64) Control Materiality (log) 0,02 (0,06) 0,02 (0,06) 0,02 (0,06) Size (log) -,01 (0,04) -,01 (0,05) -,01 (0,05) Industry 0,00 (0,00) 0,00 (0,00) 0,00 (0,00) Main effects % Female AC -,01 (0,05) -,01 (0,05) Frequency AC meetings 0,02 (0,05) 0,02 (0,05) Two-way interaction

% Female AC x Freq. AC Meetings 0,01 (0,05)

Δ R Square 0,00 0,00 0,00

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5. Conclusion and discussion

This chapter is the concluding part of this research. The first paragraph presents the conclusion and discussion of this research. After this, the second paragraph will present the limitations of this research and recommendations for future research.

5.1 Conclusion and discussion

This research included the quality of KAMs mentioned in the expanded auditor report and the influence of the percentage of women on this quality. This relation is investigated looking at data from companies listed in the UK or the Netherlands, in the year 2015. The research question was the following:

What is the impact of the percentage of women in the audit committee on the quality of the key audit matters in the expanded auditor’s report and how is this influenced by the frequency of the audit committee meetings?

Based on a literature study, two hypotheses were stated to answer the research question: 1. The percentage of women in the audit committee has a positive influence on the

quality of the key audit matters in the expanded auditor’s report.

2. The frequency of audit committee meetings has a positive influence on the relation between the women in the audit committee and the quality of the expanded auditor’s report.

In the Results chapter it has become clear that the regression analyses show that there is no significant relation between the variables and that both of the hypotheses have to be rejected. This means that there is no relation between the percentage of women in the audit committee and the quality of the KAMs and there is also no interaction from the percentage of women in the audit committee and the frequency of the audit committee meetings on the quality of the KAMs.

One of the explanations for the deviations from the theory explained in the theoretical framework can be that there are big differences in audit committee members between the companies. The descriptive statistics present that over 80% of the companies have audit committees with less than the half of women. For the female members, it could be difficult to exert influence on the independent auditor. It could be that only audit committees which consist only of women would influence the quality of the KAMs mentioned in the auditor report.

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31 Another reason could be that the way used to measure the quality of the KAMs, is not the right way to measure this variable. Maybe there should not be only attention for the actual KAM, but also to how the independent auditor has dealt with this KAM. It could be that the audit committee has more influence on what to do with the KAM than that they have on the KAM itself. This could be even more important for the users of the financial statement than the KAM itself.

The last reason which will paid attention to in this conclusion, is the way of communication between the audit committee and the independent auditor. If there is stiff communication, it could happen that the women in the audit committee do influence the quality of the audit committee, but that this is not coming to the independent auditor. Through the stiff communication the enhanced quality in the audit committee will not affect the quality of the auditor report of the independent auditor. Next to this, if the communication of the audit committee to the independent auditor will be done through a man, this could also lead to disruptions in the relation between the women in the audit committee and the quality of the KAMs mentioned in the auditor report.

5.2 Limitations and future research

One of the limitations of this research is the subjectivity in data collection. The KAMs are allocated into three different groups: entity specific, sector specific and general KAMs. Because there is no established standard to divide the KAMs into the groups, it could be that other researchers will divide the KAM into another group, what could lead to other values for the quality of KAMs. Next to this is chosen to divide them into three different groups, but some KAMs are for example not totally sector specific, but are too specific for the general KAMs. For future research it could be an option to develop some more categories or looking at how is dealt with the KAMs. Maybe is how the matter is solved a better way to measure the quality of the auditor report than only the KAM which is mentioned. The other data used in this research, is collected by several persons. This could also lead to some subjectivity in the data.

The generalizability is another limitation in this research. The sample only included companies which were listed in the FTSE 100 of FTSE 250 of the UK and listed Dutch companies. The results cannot be generalized to smaller companies. Thereby, the expanded auditor report is not mandatory for all companies and was not yet mandatory for listed

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32 companies in other countries. Since this year is there an expanded auditor report obligation in other countries. This means that this research is not generalizable for other countries.

The limitation around the generalizability for other countries, is also an recommendation for future research. The expanded auditor report is mandatory worldwide, excluded the US, for financial years ending on or after 31-12-2016. Future research could investigate interactions on the quality of KAMs in other countries and the differences between countries where the requirements where mandatory earlier, the UK and the Netherlands, and the countries where it is mandatory since the financial years ending on or after 31-12-2016.

Like mentioned, there is no relation between the percentage of women in the audit committee and the quality of KAMs. One reason could be that a large part of the included companies has less than 50% women in their audit committee. Because of this, the last recommendation for future research, is taking the variable ‘diversity in the audit committee’ broader than only the percentage of women in the audit committee. For future research it could be valuable to include factors as age, educational background, ethical background and religion.

Concluding, this research does provide a basis for future research. This chapter already gives some recommendations, but there will be much more subjects which can be investigated concerning the expanded auditor’s report.

Expanded auditor’s report: do differences between men and women lead to another quality in key audit matters?