Do you read it? The external influences of reading an extended auditor’s report

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Do you read it? The external influences of

reading an extended auditor’s report

The decision to read the extended auditor’s report influenced by financial

analysts’ reports, auditor change and industry from an investor’s perception

Rijksuniversiteit Groningen, Faculty of Economics & Business

21-01-2019 D.A.M. Dubblinga Studentnumber: S2334941 Billitonstraat 13 9715 EM Groningen Phone: 0629156234 E-mail: D.A.M.Dubblinga@student.rug.nl Supervisor:

Prof. Dr. D.A. de Waard, Rijksuniversiteit Groningen Word count: 10326

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Abstract

This paper provides the first outcomes which external influences affect the nonprofessional investor for reading the extended auditor’s report. In 2014 the new extended auditor’s report was introduced in the Netherlands as a response to the financial crisis of 2008 and multiple accounting scandals. To gain more trust in the audit profession the new extended auditor’s report obtain new standards (ISA 700) for the auditors. For this exploratory study a descriptive survey method has been used to conduct data. 101 nonprofessional investors completed the online survey published on the website of the VEB. The results for this paper suggest that when financial analysts report bad news the nonprofessional investor is more likely to read the extended auditor’s report. However, when financial analysts report good news, the nonprofessional investor will not read the extended auditor’s report. The results also confirm the presence of an auditor change positively affects the nonprofessional investor to read the extended auditor’s report. Outcomes of this paper show when a nonprofessional investor invests in the Healthcare industry they read the extended auditor’s report. By using the Coping theory in this paper, the choice of the nonprofessional investor to read or not read the extended auditor’s report can been explained.

Keywords: Extended auditor’s report, ISA 700, Financial analysts’ reports, Auditor change,

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Do you read it? The external influences

of reading an extended auditor’s report

I. INTRODUCTION

In the years after the financial crisis in 2008 and the scandals surrounding accounting (e.g. Royal Ahold, WorldCom & Parmalat) a lot happened to the profession of accountancy (Sikka, 2009). This was mostly because of the gap in expectation between what the public expects from the auditor and how the auditor perceives his role (Duréndez Gómez-guillamón, 2003; Porter, 1993). Because of the bankruptcy of the fourth-largest investment bank, Lehman Brothers, society argued that the audit profession failed to give information about important continuous issues (Carson, Fargher, Geiger, Lennox, Raghunandan & Willekens, 2013; Sikka, 2009). Society, especially investors, expects the auditor profession to be an assurance key for whether or not the financial statements are fair and true (Boolaky & Quick, 2016). The expectation is that auditor’s reports are important for investors to gain knowledge about their investments (Aqel, 2014). So, you would assume that the majority of the investors read the auditor’s report. However, research has shown that there is just a small amount of investors reading the auditor’s report (Chong & Pflugrath, 2008). This is mostly because investors only focus on the outcome of the auditor’s report and they do not actually read the auditor’s report. But why do the investors only see the auditor’s report as an assurance and do they not actually read the report? And what influence leads to actually reading the auditor’s report by investors?

Nowadays, these questions have a renewed interest because of the changes implemented in the standards for the audit report (NBA, 2014; Carson et al., 2013). In response to the financial crisis in 2008 and the accounting scandals, regulators and standard setters renewed the traditional audit report to enhance the confidence of the intended users, because the traditional audit report is perceived by the intended users as an inadequate auditor report (Backof, Bowlin & Goodson, 2017; Craig, Smieliauskas & Amernic, 2016; Carson et al., 2013; Asare & Wright, 2012; Bedard, Coram, Espahbodi & Mock, 2012). The traditional audit report included an audit opinion, which consisted of a few sentences which were varying in level of detail, leading to users being uninformed about the level of assurance (Church, Davis & McCracken, 2008). These new changes in the audit report resulted in “the extended auditor’s report” (Christensen et al., 2014), improving the information around auditor responsibilities for the intended users.

For this research, the subject of extended auditor’s reports is investigated. This will lead to more information on the investor’s perception of reading the extended auditor’s report. The main purpose for implementing an extended audit opinion is to provide greater

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5 transparency. This is done by giving investors company-specific information on identified risks of material misstatements and how the audit is conducted (FRC, 2015). Extended auditor’s reports were implemented in response to investor’s negative view on the traditional audit report (FRC, 2015). In the United Kingdom (UK), the Financial Reporting Council (FRC) issued auditing standard changes concerning the audit opinion. The FRC implemented these changes in October 2012 for the financial statements of 2013 and onwards. In the Netherlands, the “Koninklijke Nederlandse Beroepsorganisatie van Accountants” (NBA - The Royal Netherlands Institute of Chartered Accountants) (NBA, 2014) standardized these changes in 2014. The changes that were implemented in the Dutch accounting standards provide an extended audit opinion that highlights an overview of (NBA, 2015):

- The application of materiality; - The risks of material misstatement;

- The scope of the audit, including the response to risks of material misstatement and the application of materiality.

One of the outcomes of the financial crisis to improve the audit expectation gap is the extended auditor’s report (Claessens, 2010). The expectation gap in the audit results from misalignment between what intended users expect from the auditor and what they actually receive (Duréndez Gómez-guillamón, 2003; Porter, 1993). Enhanced communication from the auditor to the society through the extended auditor’s report reduces mostly three issues of the expectation gap: the users’ understanding of the audit, auditor transparency and the informativeness (IFAC, ISA 701). The auditor issues the extended auditor’s report as a key contributor to financial stability, trust and market confidence. This gives a true and fair view of the financial statement and provides an independent professional opinion (Boolaky & Quick, 2016).

Lennox, Schmidt & Thompson (2016) review that the individual investors’ responses to the extended auditor opinion are not very positive. In fact, investors use other sources than the extended auditor opinion to assess their risks. Investors find that the extended audit opinion is uninformative in comparison to the management disclosure (Lennox et al., 2016). Furthermore, Chong & Pflugrath (2008) find that an expanded auditor’s report has little influence on the shareholders perceptions.

However, several researches found a positive relation between the extended auditor’s report and the use by investors (Reid, Carcello, Li & Neal, 2016; Sirois, Bédard & Bera, 2016, Boolaky & Quick, 2016). Boolaky & Quick (2016) explain there is a positive relation between the extended auditor’s report and the reliability of the financial statement, which are used by investors to make a judgement. Reid et al. (2016) found that there is a significant increase in the abnormal trading volume in the UK, after the implementation of the mandatory long-form auditor’s report (extended auditor’s report). The research of Sirois et al. (2016)

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6 examines if additional information in the extended auditor’s report affects the users’ perception of financial statements. The evidence they found supports that users of extended auditor’s reports increase their attention towards matters consistent with the extended auditor’s report and pay less attention to other financial statement information. In other words, long-form auditor’s reports are valuable and relevant for the users of the financial statements.

The literature shows that extended auditor’s report have different relations (positive/negative) with the society (Reid et al, 2016; Lennox et al., 2018; Chong et al., 2008; Sirois et al., 2016; Boolaky et al., 2016). Therefore, it is important to investigate the several influences on why investors make the decision to read or not to read the extended auditor’s report. In this research, the extended auditors report is combined with the financial statements, because of the relation mentioned in Sirois et al. (2016). Also, the auditor’s opinion is included in the organization’s annual report where intended users can find the financial statement and can conclude the ratio’s that help the investors in making an investment decision. In addition, this research elaborates on influences that affects the investor’s decision to read or not read the extended auditors report. These influences are financial analysts’ reports, auditor change and industry investments. As a result, the research question guiding this research paper is:

To what extent is the decision to read the extended auditor’s report influenced by financial analysts’ reports, auditor change and industry investments, from an investor’s perception?

To verify the main question, the following research sub-questions are formulated, explained further in the Theoretical Background:

i) If the financial analysts report bad news, are investors more likely to read the extended auditor’s report?

ii) If the financial analysts report good news, are investors more likely to not read the extended auditor’s report?

iii) If there is an auditor change, are the investors more likely to read the extended auditor’s report?

iv) Does the industry where invested in, has a positive impact on the investor reading the extended auditor’s report?

These four research sub-questions are answered by a survey under Dutch investors, this includes nonprofessional investor that invest for their own, so called private investors. Therefore, this research makes a differentiation between investments decisions from investors that are less informed (nonprofessional investors) and professional investors. The main reason to differentiate is that the nonprofessional investors are extensive users of the auditors’ report (Arnold, Bedard, Philips & Sutton, 2010).

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7 Our exploratory study makes multiple contributions to the literature. First, the extended auditor’s report was implemented first in the UK, so prior research mainly focusses on the extended auditor’s report in the UK (Lennox et al., 2018). Porumb, Karaibrahimoglu, Hooghiemstra & De Waard (2018) document that extended auditor’s report disclosure contain relevant information in shaping the loan contracting terms. The Porumb et al. (2018) research contributes to the empirical evidence that the extended auditor’s report provide benefits to the extensive users of the renewed extended auditor’s report. Consistent with Porumb et al. (2018), Reid (2015) find that the UK extended auditor’s report significantly increases abnormal trading volume, which leads to benefits of the extended auditor’s report. In other words, prior research has mainly put the focus on the UK. Our study contributes to the empirical evidence under the Dutch nonprofessional investor users of the extended auditor’s report.

Second, our findings add timely evidence on the importance of the extended auditor’s report from a nonprofessional investor’s perception. Consequently, it contributes to the literature in the usefulness of the standard settings of audit disclosure (Lennox & Pittman, 2011) and it adds to the emerging literature that document the effects of adjustment in the standard settings in the audit report (Lennox et al., 2018; Reid 2016; Reid et al., 2015; Amiram et al., 2015; Gutierrez et al., 2016; Patterson & Smith 2016). This research is, to the best of our knowledge, the first to empirically assess if non-professional investors actually read the entire extended auditor’s report by quantitative research, with the help of a survey. Our findings have policy implications, by means of the evidence we provide of the effects by the adjustments in standard setters in auditor’s report. Furthermore, our results provide outcomes that will guide the iterative process in the extensive debates on the mandatory audit report (Bédard, Coram, Espahbodi & Mock, 2014).

Third, our study contributes to the literature of reasons for reading the extended auditor’s report. Prior research on the extended auditor’s report focused on the content of the reports like Key Audit Matters, the readability or audit quality (Boolaky et al., 2016; Sirois et al., 2014; Bedard et al., 2014; Christenen et al., 2014; Prasad & Chand, 2017). This means that prior research focused more on internal influences instead of external influences for reading the new extended auditor’s report. Furthermore, this means that prior research mainly focused on internal segments of the extended auditor’s report. Consequently, our contribution is to the existing literature by investigating the external influences of reading the extended auditor’s report in general.

Next to the academic contribution, this research contributes to society. The letters, the “Vereniging van Effectenbezitters” (VEB – Association of Dutch Investors) describes the importance Dutch accountancy firms have for society through the extended auditor’s report (VEB-Letters, 2014-2018). VEB suggests in these letters improvements with regard to the information in the extended auditor’s report and the explanatory notes about it, at the

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8 annual general meeting (AGM). Due to the influence VEB has on the Dutch accountancy firms and the fact that VEB acts on behalf of 42.000 private investors’ members1_{, 3% of 1.4}

million Dutch private investors2_{, our survey under the members of the VEB makes a relevant}

contribution to society. Based on the large amount of 26 billion euro investments3_(invested

by the 1.4 million Dutch private investors), this research is relevant to society. Furthermore, because of the easy accessibility of the members of the VEB, our survey is done within the private investors’ members of the VEB.

The remainder of this thesis is as follows. First, the theoretical background is discussed with an elaboration on ISA 700, related literature and hypotheses development. Second, the methodology is explained for the various hypotheses. Next, the outcomes of the tests are shown in the results chapter. In the last chapter, the empirical findings of this thesis are discussed and concluded.

1_{https://www.veb.net/over-de-veb-menu/about-the-veb}

2_{https://www.deaandeelhouder.nl/nieuws/2017/11/09/aantal-particuliere-beleggers-groeit/} 3_{https://www.dnb.nl/nieuws/nieuwsoverzicht-en-archief/Statistischnieuws2018/dnb378222.jsp}

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II. THEORETICAL BACKGROUND

The Extended Auditor’s Report on the Financial Statements: ISA 700

ISA 700. The main functions of the International Standard on Auditing 700 implies (1) how the auditor’s responsibility forms an opinion on the financial statement and (2) how the form and content of the auditor’s report is issued as a result of an audit of financial statements (NBA, ISA 700). With the audit report we mean a communication-tool (Pound, 1981) in which the results of the audit process, including an audit opinion of the organization’s financial statement are fairly presented (Porumb et al., 2018). As mentioned earlier, the changes implemented in the standards for the audit report lead to “the extended auditor’s report” (Christensen et al., 2014). In other words, the two main functions of ISA 700 are subjected to the overall function of an audit report and ISA 700 is one of the ISA’s that leads to the foundation of the introduction of the Dutch extended auditor’s report in 2014 (NBA, 2015; Christensen et al., 2014).

In 2014, the changes that are introduced in ISA 700 require auditors of Public Interest Organizations (PIOs) to report 1) the application of materiality, 2) the risks of material misstatement and 3) the scope of the audit, including the response to risks of material misstatement and the application of materiality (NBA, 2015). First, The International Auditing and Assurance Standards Board (IAASB) defines materiality as ‘’a matter of professional judgment, and is affected by the auditor’s perception of financial information needs of users of the financial statements’’ (IFAC, ISA 320, paragraph 4, p.314-315). The NBA (2014) standardized that the auditor assess the materiality and explains the methods they use in determining. Second, the risks of material misstatement are explained in paragraph 8 (ISA 700) as Key Audit Matters (KAMs). The KAMs are a central element of disclosure in the audit report (NBA, 2015). According to NBA (2015), the definition of KAMs is “those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period” (ISA 700, paragraph 13). For the auditor this definition means that besides explaining the key audit matters that are considered to be the most significance, they also have to answer the question how the KAMs are addressed in the audit. Third, the scope of the audit is influenced by the complexity of the organization, circumstances and facts of the audit engagement, and the nature of its business and environment. The IAASB expects that the auditor’s report documents at least one KAM (Porumb et al., 2018).

Since the implementation of ISA 700, the NBA & VEB made several reviews (2015, 2016) on the newly introduce extended auditor’s report. According to the VEB, based on the first and last two years (2015, 2016), the investors value the new auditor’s report. To be more precise, the 2016 review highlighted the disclosure about materiality, risk and scope, as transparent, clear and concise. It also said that “the language used in auditors’ reports

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10 move away from generic risk descriptions and language generally, in favor of more granular description” (VEB, 2016, p. 3). This leads towards decreasing the audit expectation gap, because of an increased value of information in the extended auditor’s report since 2014. As previously explained, the extended auditor’s report, including the corresponding ISA’s, reduce mostly three issues of the audit expectation gap: the users’ understanding of the audit, auditor transparency and the informativeness (IFAC, ISA 701).

Related Literature and Hypotheses Development

Extended auditor’s report: Agency Theory and Coping Theory

The extended auditor’s report is defined by Brasel et al. (2016) as “information regarding auditors’ responsibilities, the extent and nature of audit procedures, and insights gained from applying those procedures”. This definition is consistent with the purpose and description of ISA 700, as previously explained. The extended auditor’s report will be explained by two theories, the Agency Theory and the Coping Theory. These theories outline the external influences on reading the extended auditor’s report by investor’s perception. Furthermore, Agency Theory and Coping Theory can be seen as independent explanations on reading the extended auditor’s report. In this research, we propose that the two theories are complementary and that they are necessary to fully explain how the investor makes the decision of reading the extended auditor’s report.

Agency Theory. The Agency theory is flushed with traditional studies examining the role of the external auditor and the role of reporting (Adams, 1994; An, Davey, & Eggleton, 2011). Jensen & Meckling (1976, p. 5) describe the Agency theory as: “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent”. The Agency theory postulates that the principal-agent relationship leads to an information asymmetry problem, which hinders investors (principals) from effectively monitoring the opportunistic behavior of the auditors (agents) (Adams, 1994). Healy & Palepu (2001) analyze the demand by stakeholders for disclosing more financial information, because of the information asymmetry problem. This means that disclosing more financial information decreases information asymmetry (Healy & Palepu, 2001). In other words, the auditor’s report is the foundation for mitigating the information asymmetry problem, because such mechanisms as auditor’s report reinforces the trust between the investors (principals) and the auditors (agents). Nowadays, the extended auditor’s report exists of more financial information than before, as a result the information asymmetry decreases. This leads to the extended auditor’s report reduces the Agency problem and reduces the audit expectation gap between auditor and investors.

Coping Theory. Over the recent decades, several theories on how investors make decisions were developed (Wendy et al., 2014). One of these theories is the Coping theory of Lazarus & Folkman (1984). The Coping theory is based on two perspectives on which

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11 investors base their decision on: 1) Rational perspective and 2) Irrational perspective (Simon, 1959; Kahneman & Tversky, 1979; Shefrin & Statman, 1985; Ritter, 2003).) Simon (1959) explains that the rational perspective is consistent with the Economic theory, which implies that a rational decision is a cost-benefit analysis. Irrational perspective can be defined as believing’s that we are biased by psychological influences when making decisions (Wendy et al, 2014). In other words, an investor does not only make a decision on rational basis, but the decision is also influenced by emotion and behavior (irrational). “The Coping theory analyses the investors’ rational and irrational behavioral process when they face market events that require them to immediately adapt to these events” (Wendy et al., 2014, 2). There has not been much research to gain insights in the investors’ adaption strategies (Lee et al., 2009), the Coping theory explains how investors understand and react to market events (external influences). That is the reason this research uses the Coping theory to investigate the understanding of external influences and if this results in the investors reading the extended auditor’s report. To explain the Coping theory Wendy et al. (2014) use the Investor’s Adaption Model, which can be seen in Figure 1. Based on the Investor’s Adaption Model an investor acts on market events like receiving bad news from a financial analyst, auditor change or specific industry. After the market event an investor makes a consideration that is followed by an outcome, for example reading the extended auditor’s report.

Figure 1. Investor’s Adaptation Model (Wendy et al., 2014)4

The Coping theory is divided into two parts (four steps) of the coping process of the investor, namely the appraisal (primary, secondary) and the coping efforts (adaptation strategies, outcomes). First step, the primary appraisal assesses the market event as Good

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12 news/Opportunity or as Bad news/Threat. Second step, the secondary appraisal is evaluating whether the perception of the investors’ level of control (high/low) can cope with the external influence. High control explains that the investor is able to cope with the external influence through performing high control actions, low control suggests otherwise. The third and fourth step explain the response (outcomes) of the investor different actions (adaptation strategies).

If an investor chooses to read the extended auditor’s report, the outcome of the return Analysis implies the use of the Investor’s Adaption Model. This is because the Risk-return Analysis includes: (1) investors observe all the available information (including the extended auditor’s report), (2) investors analyze the prospects of the organization industrial sector and economy condition, (3) investors make a profit-loss prediction, (4) investors decide based on the extended auditor’s report. Concluding, Wendy et al. (2014) explains that investors that make a Risk-return Analysis read the extended auditor’s report, and investor’s that do not read the extended auditor’s report have the other outcomes (Underreaction, Overreaction, Self-deception, Inaction).

Financial Analysts’ Reports, Auditor Change & Industry

In this research the independent variables of reading the extended auditor’s report are based on two theories from Jensen & Meckling (1979) and Lazarus & Folkman (1984). The Agency theory will be used for the independent variables ‘financial analysts’ reports’ and ‘auditor change’. The Coping theory basically explains all the independent variables ‘financial analysts’ reports’, ‘auditor change’ and ‘industry’. These four independent variables were chosen due to the actuality and the impact each variable has on the investors’ decision. Financial analysts are relevant because of the increasing influence they have towards investors (Brown, Wesi & Wermers, 2014). In 2016, a new legislation introduced that every Dutch PIO must change their accountancy firm every ten year (NBA, 2015). Koralun (2013) documented that in the time of the financial crisis, investors make the decision to invest in low risks industries, and this means that industry has an impact on the decision of investors.

Financial Analysts’ Report. Smith (2016) suggested that there is a relation between a sell-side analyst and the extended auditor’s report. The relationship is that in the post-ISA 700 period, the sell-side analyst forecast dispersion decreased. Because of the improvement of the information environment from the extended auditor’s report, the sells-side analyst forecast dispersion has decreased (Smith, 2016). This paper shows that the information asymmetry problem of the Agency theory decreases. For further analyses between extended auditor’s report and analyst, we analyse investor’s reaction of the financial analyst news.

Plugrafth et al. (2011) define the financial analyst as employees of, for example, financial institutions who offer brokerage or investment banking. Furthermore, Plugrafth et al. (2011) document that financial analysts have extensive experience in covering stocks and

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13 researching. Also, Plugrafth et al. (2011) studies the relation between financial analyst and the assurance of a professional accountant. So, this research uses the financial analyst as publishing analyst, because of the relation mentioned in Plugrafth et al. (2011) and non-professional investors mostly use investment banking information (Arnold et al., 2010).

To follow the Coping theory we distinguish financial analyst reports in bad and good news. Xu et al. (2017) define bad news from financial analysts as news that floods the market and leads to a stock price crash. In contrary to good news, that will not lead to a stock price crash. Furthermore, prior research shows that there is a relation between financial analysts’ and investors’ decision to read the financial statements (Jo, 2010). This research has also shown that investors’ reaction to bad news from financial analysts are greater than to good news (Lustgarten & Mande, 1995). To analyze the financial analyst news (good/bad) reactions towards the extended auditor’s report, the following hypotheses are formulated:

Hypothesis 1a: If the financial analyst reports bad news, the investors are more likely to read the extended auditor’s report.

Hypothesis 1b: If the financial analyst reports good news, the investors are more likely to not read the extended auditor’s report.

Auditor Change. As previously mentioned, the Dutch legislation introduced in 2016 that every Dutch PIO must change their accountancy firm every ten years (NBA, 2015). In the literature the auditor change based on legislation is called auditor rotation (Ruiz-Barbadillo et al., 2009). In an experimental study, auditors in a country with auditor rotation were less willing to report biased auditor’s reports than those in a country without auditor rotation (Dopuch et al., 2001). This implies that auditor rotation influences the auditors’ report in a manner that improves the independence of the auditor.

Furthermore, besides the mandatory auditor rotation, the auditor changes also involve voluntarily change. In the literature, Francis et al. (2017) makes a distinction between client-initiated auditor change (dismissals) and auditor-initiated auditor change (resignations). The voluntarily auditor change is therefore defined as an auditor change that is not influenced by the legislation, but the decision to change the auditor is freely chosen by the accounting firm or the client. Francis et al. (2017, p. 3) also makes a distinction between: “lateral switches (from a Big 4 to a Big 4, or from a non-Big 4 to a non-Big 4), downward switches (from a Big 4 to a non-Big 4), and upward switches (from a non-Big 4 to a Big 4)”.

Also, research makes a distinction between voluntary and involuntary auditor change (Tanyi, Raghunandan & Barua, 2010). Based on the research of Tanyi et al. (2010), involuntary auditor change involves the change from auditor after the bankruptcy of the accountancy firm Anderson. To summarize: an auditor change can involve an auditor rotation, voluntary auditor change (lateral switches, downward switches & upward switches) and involuntary auditor change.

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14 For this research, we do not make further distinction between the three types of auditor change. We investigate the overall auditor change (auditor rotation, voluntary & involuntary) that influence the decision of the investors about reading the extended auditor’s report. This limitation is based on the fact that the survey presented to the members of the VEB must be accessible and short. Furthermore, we expect that the private investors’ members of VEB do not have experience with the different kinds of auditor change.

In the literature, investors benefit from useful information due to the disclosure requirement, resulting from auditor changes (Francis et al., 2017). Also, investors found shopping for an accountancy firm (multiple changes of accountancy firm in a short period of time) could imply that those organizations are searching for an accountancy firm that accepts their non-Generally Accepted Accounting Principles (GAAP) accounting standards (Francis et al., 2017). The literature of Francis et al. (2017) shows that investors have an opinion about auditor change. Our expectation is that auditor change will have an effect on investor’s perception of reading the extended auditor’s report, based on the evidence of Bolk (2018). Bolk (2018) found evidence that accounting firms lean towards reporting in a different way, after the organization change their accounting firm. Consistent with the Coping theory the investor can choose good or bad news as reaction to the auditor change, but in the secondary appraisal the investor chooses the high control, with the outcome reading the extended auditor’s report. In the Investors’ Adaptation Model the outcomes are risk-return analysis or overreaction. The investor chooses the high control, because the auditor change makes a different. To analyze the auditor change in relation to extended auditor’s report, the following hypothesis is formulated:

Hypothesis 2: If there is an auditor change, the investors are more likely to read the extended auditor’s report.

Industry. To distinguish between different kinds of investors and external influences on reading the extended auditor’s report we use the variable ‘industry’. The definition of the different sectors of the industry is based on the Global Industry Classification Standard (GICS) (Hrazdil & Scott, 2011). GICS distinguish 11 industries, further defined in the Research Design.

Previous researches of assurance reports use the different kinds of industries to analyze the relation between the disclosure of information in the assurance report and high-risk industries versus low high-risk industries (Plugrath, Roebuck & Simnett, 2011). Bolk (2018) finds that the content of the extended auditor’s report is client-specific. Furthermore, CSR assurance report of different industries affect the investment decisions of non‐professional investors in China (Shen, Wu & Chand, 2017). These three studies show that there is a relation between a specific industry and an auditor’s report.

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15 Also, for investors the industry is an important part of understanding in which organization they invest. Many studies have found that there is a significant relation between investor’s decision and industry (Wendy et al., 2014). Based on the Coping theory and Plugrath et al. (2011) we suggest that investors see some industries as bad news or as good news to invest. To analyze which industries investors choose to invest in and if it has an effect on the readership of the extended auditor’s report, the following hypothesis can be formulate:

Hypothesis 3: The industry invested in, has a positive impact on the investor reading the extended auditor’s report.

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III. METHODOLOGY

Data Collection Method & Participants

This research is a descriptive survey research, because we analyze external influences that describes the readership of the extended auditor’s report. This research focuses mostly on the question what influences the investors to read the extended auditor’s report through statistical data analysis. Descriptive survey separates which influence (independent variable) contribute to the group of investors that read the extended auditor’s report (dependent variable). In other words, this analysis profiles which external influence results in reading and which result in not reading the extended auditor’s report.

The data collection is conducted through a survey, presented to the members of VEB that apply for the digital newsletter. The members of VEB are a good indicator in general for nonprofessional investors, one specific group of intended users of the extended auditor’s report and financial statements. This is mostly because VEB members consist of private investors and institutional investors. Our focus is on private investors. The survey was

published on their website on October 25th_{(2018) and embedded in the digital newspaper}

last week of October 2018. Approximately 42.000 VEB members that applied for the digital newspaper and visited the website of VEB have been exposed to the survey. The survey was open for five weeks and presented in Dutch, because VEB is a Dutch association. The response rate is low, because there are 101 respondents with a reach of 42.000 VEB members (response rate = 0.24%).

As previously mentioned our research is survey-based. The reason for a survey-based is to get more insights in if nonprofessional investors read the extended auditor’s report. So, we can conclude based on our sample the quantity that actually reads the new auditors’ report and to find out which reasons nonprofessional investors have to (not) read the extended auditor’s report. To facilitate this, the following steps were subsequently followed in the survey under the members of VEB (Table 1). The content of the survey can be found in

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17 Appendix A. Several questions of the survey will be excluded for this research, because this survey is also a composite for other researches. The survey design is built based on the theory of Fallowfield (1995) and Foreman (1985).

Measures

Dependent Variable: Readership of the Extended Auditor’s Report

To measure the dependent variable ‘the readership of the extended auditor’s report’ we start with the question in step 3 (Table 1). Q15 determines to what extent which information sources investors use in their decision making. Multiple information sources can be answered. To what extent which information sources investors use is answered by a 5-point Likert-type scale (Never; Rarely; From time to time; Frequent; More than frequent). Our main focus in Q15 is to what extent the investors use the organizations’ annual reports and information from financial analysts’ reports. In the follow up question (Q16) we asked to which part of the organizations’ annual report the respondents specifically pay attention, including the possibility to answer the extended auditor’s report. Q16 is asked hypothetically, because we can distinguish between the respondents that read and do not read the organizations’ annual report in Q15. The reason why we use a hypothetical question is that even though the respondents that do not read the organizations’ annual report (Q15), we still get the answer if they find the extended auditor’s report an important part in the organizations’ annual report. Perhaps they simply do not have the time to read the organizations’ annual report. To summarize, Q16 answers to the following questions: (1) if the respondents read the extended auditor’s report and (2) the importance of the extended auditor’s report in the organizations’ annual report. The respondents that do read the organizations’ annual report (Q15) do not answer the hypothetical Q16 & Q17.

To gain more insights in which parts of the extended auditor’s report the respondents read, Q17 is embedded. Furthermore, Q17 shows to what extent the new elements of the extended auditor’s report are being used. This complements with Q15 & Q16, as these give insights if the extended auditor’s report is used as a whole. Our main regression analyses with the independent variables have the focus on Q15 & Q16 and Q17 will be mentioned in the conclusion and discussion.

For the data-analysis we measure READSHIP_EAR as variable for the dependent variable ‘readership of the extended auditor’s report’. This is measured as a dummy variable (YES/NO reading the extended auditor’s report). Derived from Q15 (YES/NO reading the financial statement), if the respondent answer NO on reading the financial statement, the respondent are categorize as NO under READSHIP_EAR. If the respondent answer YES by Q15, Q16 indicates if they read the extended auditor’s report. Respondents who answer the extended auditor’s report fall in the YES group, if they do not answer extended auditor’s report they are categorized in the NO group under the READSHIP_EAR.

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18 Independent Variables

Financial Analysts’ Reports. To measure hypotheses 1a and 1b we first explain the data collection from the survey questions. The following questions in step 4 will be used:

- In which situations the respondents shall read the extended auditor’s report, including financial analyst reports bad and good news (Q21)

The information provided from Q21 is based on a 5 point Likert-type scale, namely: highly unlikely, unlikely, neutral, likely and very likely. Following the Investor’s Adaptation Model (Coping theory) the 5 point Likert-type scale gives a good indication for the outcomes respondents choose to follow when a financial analysts reports bad or good news. We assume that respondents who answer ‘likely’ or ‘very likely’ in good or bad news financial analysts’ reports, will follow the ‘high control’ step in the Investor’s Adaptation Model. That leads to the outcome ‘risk-return Analysis’ or ‘Overreaction’. Risk-return Analysis and overreaction both indicate that respondent shall read the extended auditor’s report. The second assumption is if respondents answer ‘neutral’, they will follow the step ‘low control’ and have as outcome ‘underreaction’ and ‘inaction’. The last assumption is about when a respondent answer ‘highly unlikely’ or ‘unlikely, they will take the step ‘low control’ and have the outcomes ‘underreaction’, ‘Self-deception’ or ‘Inaction’. This research makes no further distinction between the five outcomes, only the distinction mentioned above.

To measure the hypotheses 1a and 1b we use the variables FAR_GOOD (financial analysts’ report good news) and FAR_BAD (financial analysts’ report bad news. Both variables are measured with a score from 1 till 5 (highly unlikely – very likely) and used in the data-analysis in relation with the readership of extended auditor’s report.

Auditor Change. To research hypothesis 2 ‘If there is an auditor change, the investors

are not likely to read the extended auditor’s report’ in the survey, we use the following

question in step 4:

- To what extent a respondent shall read the extended auditor’s report, when an auditor change occur (Q21)

The independent variable auditor change follows the same method with the 5-point Likert-type scale as mentioned by the financial analysts’ reports, the only difference is that we make no distinction between if auditor change is good or bad news, because we do not use the three types of auditor change in this research. Furthermore, the variable auditor change follow the same path in the Investor’s Adaptation Model as the variable FAR_GOOD. In other words, auditor change follows the ‘high control’ step, leading towards an ‘Risk-return Analysis’ or ‘Overreaction’

In the data-analysis AUD_CHANGE is being used to measure this hypothesis, with a score from 1 till 5 (highly unlikely – very likely).

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19 Industry. To investigate hypothesis 3, the last independent variable industry, indicates which industry the investors/respondents have a positive significant effect on reading the extended auditor’s report. To research in which industry the respondents invest, we had a question in step 2 of the survey:

- In which industry you mostly invest (Q13)

Q13 is categories in eleven industry categories based on the Global Industry Classification Standard (GICS). GICS categories are: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, information Technology, Telecommunication Services, Utilities, and Real Estate. Furthermore, the respondents can answer in Q13 that they do not invest in a specific industry and ‘others, namely’. By including the answer ‘others, namely’, we mitigate the bias in the question that if respondents have no clue about the meaning of the GICS industry. If respondents answer ‘others, namely’, we categorize their answer in one of the eleven GICS categories. Our research is based on GICS, because it is made by researchers that take the investor of this century into account (Chung et al. 2017). Also, the continued research from Chung et al. (2017) indicate advantages to using GICS, as it has homogeneous categorization of forecast-related applications such as uncertainty, dispersion and accuracy.

To measure the independent variable industry we use in the data-analysis the industry category names and a dummy variable is measured for each industry the investor invest in.

Control Variables

Besides the independent variables mentioned, other variables can have an influence on the readership of the extended auditor’s report. Ensuring that only the independent variables have an effect on the dependent variable, we embedded control variables in our data analysis. For reducing the overall error in the data analysis, the following control variables are included: age (AGE), education (EDUCATION). AGE or a score based from 1 till 7 (7 age categories), and EDUCATION is score based in high education (university) and low education (High school, Secondary vocational education and Higher professional education). We include them as covariates in the probit multiple regression model of investors’ perception of the readership of the extended auditor’s report. The reasoning behind the use of the control variables gender and education is that several researches proves that there is a significant effect on extended auditor’s report (Boolaky et al., 2016; Gold et al, 2012).

Furthermore, to gain more significant relations between the dependent variable EAR and the independent variables in this exploratory study, the following external influence variables are included: Knowledge_New_EAR, Read_Finreport, Info_Bank, Newspaper, Friends and Scandals. These control variables in this explorative study are also chosen to exclude random variables that influence the readership of the extended auditor’s report and to prove that reports of financial analysts, auditor change and industry are the key external influencers for reading the extended auditor’s report. Knowledge_New_EAR explains the

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20 knowledge nonprofessional investors have with the new regulations for the extended auditor’s report. Read_Finreport indicates if nonprofessional investors read the financial reports of the relevant organization. For Info_Bank, the nonprofessional investors use the information from banks to decide for investment. Newspaper and Friends can also be defined as other external sources investors get their information from to invest. The last control variable Scandals means the scandals in financial reports of organizations. The definition of scandals in financial reports is the occurrence of fraudulent financial reporting (Beasley et al., 2000). Beasley et al. (2000, p.191) define fraudulent financial reporting as “an intentional misstatement or omission of material information from an organization’s financial reports”. Meaning that scandals of financial reports include misstatement of material information in a financial report.

Statistical Model

Because this survey-based research is performed in a quantitative way with statistical tests, a descriptive analysis is used to test the influence of financial analysts’ reports, auditor change and industry. The following multiple regression model is used:

READSHIP_EAR = 𝛽0 + 𝛽1FAR_GOOD+ 𝛽2FAR_BAD + 𝛽3AUD_CHANGE + 𝛽4INDUSTRY + 𝛽5AGE + 𝛽6EDUCATION + 𝛽7Knowledge_New_EAR + 𝛽8Read_Finreport + 𝛽9Info_Bank +

𝛽10Newspaper + 𝛽11Friends+ 𝛽12Scandals + 𝜀𝑖

The constant in the formula is 𝛽0. 𝛽1 indicates the variables used in this research and 𝜀𝑖 represents the distortion term. To explain the words (variables) used in the regression model, the following table is made:

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Table 2

Summarization of Variables

Variable Measure

Dependent variable

READSHIP_EAR Yes/No readership of EAR, based on Q15 & Q16 (No = 0, Yes = 1)

Independent variables

FAR_GOOD Score based on the 5 point Likert-scale (1-5 score), based on Q21

FAR_BAD Score based on the 5 point Likert-scale (1-5 score), based on Q21

AUD_CHANGE Score based on the 5 point Likert-scale (1-5 score), based on Q21

Industry: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, HealthCare, Financials, Information Technology, Telecommunication Services, Utilities, Real Estate

CIGS categories of industries plus not specific industry, based on Q13. Dummy variable for each industry category (No = 0, Yes = 1)

Control variables

AGE Score based on the 7 age categories (1-7 score) EDUCATION Score based on high education(1) & low education (0) Knowledge_New_EAR Score based on 3 points (Yes= 1, Little = 2, Never = 3) Read_Finreport Score based on the 5 points Likert-scale (1-5 score),

based on Q15

Info_Bank Score based on the 5 points Likert-scale (1-5 score), based on Q15

Newspaper Score based on the 5 points Likert-scale (1-5 score), based on Q15

Friends Score based on the 5 points Likert-scale (1-5 score), based on Q15

Scandals Score based on the 5 points Likert-scale (1-5 score), based on Q21

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Validity & Reliability

In general a survey-based research is predisposed to several well-known problems in validity and reliability. Below we outline the most significant limitations and reservations for this research.

Validity. A proactive approach to the problem that respondents not respond or complete the survey and for getting a higher validity in this research, two academics extensively review the survey. Named as the well-known non-response bias. To deal with the non-response bias we follow the procedure that Morgan (1974) suggests. Morgan (1974) suggests that the late respondents are the same as the non-respondents. To get an indication of any likely differences between those responding and those not responding nonprofessional investors a comparison of early and late respondents has been made. Our approach is to follow Morgan (1974) approach and split the respondents in two equal groups (early and late respondents) and perform a statistical analyses and determine whether any differences exist in background characteristics and the extent of reading the extended auditor’s report. The statistical analysis Chi-Square tests is performed for education, age, the time the respondents are active investors and the readership of the extended auditor’s report. The results revealed no significant differences between the early and late respondents, because there is a high Chi-Square of 0.993.

Furthermore, because of the low response rate our external validity is low, so we can conclude that the outcomes are not a reflection for all the nonprofessional investors (private investors) in the Netherlands. By following Fallowfield (1995) and Foreman (1985) for building the survey, we have a higher content and correlation validity.

Reliability. To determine the reliability of multiple questions for measuring one variable the Cronbach’s Alpha is in place. The Cronbach’s Alpha for the readership of extended auditor’s report is high (α= 0.877). The two questions in the survey for readership can be merged into one variable.

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IV. RESULTS

Descriptive

Respondents. Table 3 in the appendix describes the percentages of the relevant outcomes of the questions that were asked in the survey. The main outcome of the survey is that 42% of the respondents actually read the extended auditor’s report. The 42% private investors that read the extended auditor’s report are largely older than 50 years old and mainly male. Respondents’ education is almost equal for low and high education (high = 48%; low = 52%). 64% of the respondents are more than 20 years active as an investor and 38% have the purpose for investing to gain maximum capital growth against 31% investing for their pension accrual. Furthermore, 55% of the respondents invest in stocks, 16% in obligations, 10% in derivatives, 10% in trackers and 9% in sustainable funds.

Correlations. The means, standard deviations, and Pearson zero-order correlations between all the key variables are presented in Table 4. As shown in the table, FAR_BAD has a significant positive relation with READER_EAR and FAR_GOOD has a significant negative correlation with READER_EAR. This suggest that if a financial analyst reports bad news the respondent is more likely to read the extended auditor’s report. If a financial analysts reports good news the respondent is less likely to read the extended auditor’s report. The relation between AUD_CHANGE and READER_EAR is also positively related. This indicates that if there is an auditor change in the investing company a respondent is more likely to read the extended auditor’s report. Furthermore, the different industries have positive and negative relation with READER_EAR. For Energy, Material, Healthcare, Financials, Information Technology and Real Estate there is a positive relation with if respondents read the extended auditor’s report. The respondents that invest in not specific industries, Industrials, Discretionary Consumers, Staples Consumers, Utilities and Telecom are negatively correlated with READER_EAR. In addition the other sources that respondents use for gaining knowledge to invest are financial reports, newspaper, information of banks and friends. Only the variable Friends has significant negative relation with READER_EAR. Also, the knowledge of the new extended auditor’s report by the respondent is negatively correlated with READER_EAR. Meaning that if more investors do not have knowledge about the new extended auditor’s report, the readership of the extended auditor’s report is lower. The last variable Scandals has a positive relation with READER_EAR. This indicates that the presence of scandals leads to more investors reading the extended auditor’s report. Furthermore, in table 4 there is no multicollinearity between the variables, because every value in under the 0.8 (Field, 2013).

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24 Variables M SD 1 2 3 4 5 6 7 8 9 10 11 12 1. Reader_EAR 0.42 0.50 1.00 2. FAR_BAD 3.07 1.36 0.25* 1.00 3. FAR_GOOD 2.71 1.26 (0.23)* 0.78** 1.00 4. AUD_CHANGE 2.97 1.40 0.39** 0.60** 0.62** 1.00 5. Not specific 0.16 0.37 (0.15) (0.08) (0.01) (0.07) 1.00 6. Energy 0.62 0.49 0.11 (0.01) 0.03 (0.02) 0.58** 1.00 7. Material 0.41 0.49 0.08 (0.10) (0.18) (0.16) (0.34)** 0.48** 1.00 8. Industrial 0.34 0.48 (0.18) (0.02) (0.04) (0.12) (0.31)** 0.25 0.31** 1.00 9. Discretionary consumers 0.34 0.48 (0.02) 0.01 (0.01) 0.01 (0.33)** 0.21* 0.13 0.15 1.00 10. Staples consumers 0.43 0.50 (0.08) (0.21)* (0.15) (0.21)* (0.37)** (0.38)** 0.43** 0.28** 0.22* 1.00 11. Healthcare 0.33 0.47 0.18 0.01 (0.01) (0.03) (0.30)** 0.32** 0.28** 0.13 0.26** 0.30** 1.00 12. Financials 0.56 0.50 0.05 (0.08) (0.13) (0.08) (0.49)** 0.39** 0.28** 0.29** 0.13 0.35** 0.23* 1.00 13. Information technology 0.43 0.50 0.05 (0.10) (0.07) (0.07) 0.37** 0.55** 0.39** 0.28** 0.22* 0.35** 0.30** 0.27** 14. Utilities 0.14 0.35 (0.05) 0.01 (0.09) (0.16) (0.17) 0.19 0.25* 0.20* 0.29** 0.29** 0.15 0.17 15. Real Estate 0.38 0.49 0.01 0.05 0.03 0.01 (0.34)** 0.39** 0.44** 0.22* 0.05 0.16 0.11 0.43** 16. Telecom 0.27 0.45 (0.01) 0.05 (0.01) (0.10) (0.26)** 0.37** 0.36** 0.14 0.14 0.29** 0.20* 0.35** 17. Age 5.77 1.30 0.13 0.19* 0.18 0.05 (0.20)* 0.35** 0.22* 0.01 0.01 0.10 0.17 0.09 18. Education 0.49 0.50 0.03 (0.18) (0.30)** (0.21)* 0.07 0.06 0.12 (0.06) 0.04 0.13 0.04 (0.07) 19. Knowledge_New_EAR 1.73 0.82 (0.44)** (0.04) (0.08) (0.31)** 0.11 (0.18) (0.01) 0.10 (0.05) 0.06 (0.01) 0.07 20. Read_Finreport 0.90 0.30 0.15 0.19 0.27* 0.14 (0.13) 0.22* 0.07 0.10 0.11 0.08 0.09 0.18 21. Info_Bank 0.58 0.50 0.14 0.09 0.08 0.01 0.04 0.05 0.01 (0.04) (0.03) 0.12 (0.02) 0.07 22. Newspaper 0.95 0.22 0.19 0.01 0.05 0.09 (0.15) 0.11 0.10 0.16 (0.02) 0.10 0.09 (0.03) 23. Friends 0.57 0.50 (0.21)* (0.06) (0.04) (0.08) 0.05 (0.01) (0.02) (0.02) 0.07 0.01 0.09 (0.03) 24. Scandals 3.78 1.25 0.26** 0.58** 0.42** 0.38** 0.01 (0.10) (0.11) (0.01) (0.07) (0.14) (0.06) (0.03)

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25 Variables 13 14 15 16 17 18 19 20 21 22 23 24 13. Information technology 1.00 14. Utilities 0.18 1.00 15. Real Estate 0.28** 0.22* 1.00 16. Telecom 0.43** 0.41** 0.27* 1.00 17. Age 0.17 0.09 0.23* 0.19 1.00 18. Education 0.05 0.13 (0.10) 0.04 (0.04 1.00 19. Knowledge_New_EAR (0.09) 0.20* 0.01 0.06 0.02 (0.17) 1.00 20. Read_Finreport 0.15 0.04 0.12 0.20* (0.06) 0.02 (0.20) 1.00 21. Info_Bank (0.01) (0.13) 0.24* 0.06 0.05 0.02 (0.02)* 0.26** 1.00 22. Newspaper 0.10 (0.17) (0.01) 0.14 0.10 (0.05) (0.02) 0.23* (0.09) 1.00 23. Friends 0.05 0.06 (0.12) 0.25* (0.15) (0.05) 0.23* (0.08) 0.05 (0.20)* 1.00 24. Scandals (0.15) (0.02) (0.06) 0.02 0.04 (0.21)* 0.02 0.10 0.09 0.03 (0.07) 1.00 **. Correlation is significant at the 0.01 level (1-tailed).

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Regression Analyses

Main test. In Table 5, the results of the regression analyses used to test hypotheses 1a, 1b, 2 and 3 are presented. To highlight each hypothesis, four models are included to separate the contributions of the various variables. In Model 1 the first hypothesis is tested with the control variables. Also, Model 2 (hypothesis 1b) and Model 3 (hypothesis 2) are tested with the same control variables. Only model 4 (hypothesis 3) has an extra control variable ‘Scandals’. The reason for including Scandals in model 4 and excluding it in the other models is because of the relation Beasley et al. (2000) mention in their research paper. This relation indicates that scandals occur more in some industries. They identified trends in fraudulent reporting practices by industry. For example, in the Information Technology industry misstatements of revenues were common.

Support has been found for the positive relation between financial analyst reports bad news and reading the extended auditor’s report by private investors, as expected in hypothesis 1a. Hypothesis 1a is accepted. The outcomes in Table 5 show that the coefficient of the linear term FAR_BAD is positively significant (Model 1, b=0.06, p<0.05). Also, evidence has been found for the negative relation between financial analyst reports good news and reading the extended auditor’s report, as expected in hypothesis 1b. This means hypothesis 1b is accepted. The coefficient of the linear term FAR_GOOD is significant negative (Model 2,

b=0.018, p<0.05). The differences between hypothesis 1a and 1b is that the industries

Material and Real Estate are significant by hypothesis 1b. Furthermore, Healthcare is more positively significant in Model 2 than in Model 1.

Outcomes for hypothesis 2 indicate that there is a highly significant positive relation between the presence of AUD_CHANGE and reading the extended auditor’s report (Model 3,

b=0.17, p<0.01). This means hypothesis 2 is accepted. Model 3 supports that other external

sources private investors use, have influence on reading the extended auditor’s report (Info_Bank, b=0.09, p<0.10).

The positive relation between the presence of an industry investment by private investors and reading the extended auditor’s report (hypothesis 3) is only supported by the industry ‘Healthcare’ (Model 4, b=0.02, P<0.05). Based on the Healthcare industry hypothesis 3 is accepted and for the other industries hypothesis 3 is rejected. For example, the industry ‘Industrial’ has a negative relation with reading the extended auditor’s report. In Model 4 support has been found that a scandal of an organization has a negative relation with reading the extended auditor’s report. Concluding, in all models the control variable Knowledge_New_EAR has a highly significant negative relation with reading the extended auditor’s report (b=1.48/1.38/1.29/1.53, p<0.01).

The values of R-Square 0.35, 0.34, 0.38 and 0.37 indicates how close the data fits the multiple regression line, in this case for the four models it is they are respectively 35%, 34%, 38% and 37%. Outcomes of the R-Squares (0.35, 0.34, 0.38 & 0.37) are a good low value,

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27 because humans (nonprofessional investors) are hard to predict, so it is common that the R-Squares are lower than 50%.

Robustness Test. To gain more insights in which industry investment has no effect on reading the extended auditor’s report, a robustness test has been done. The outcomes in Table 6 (Appendix 3) indicate that the industries Material, Industrial, Staples Consumers, Financials, Utilities and Real Estate have a negative significant relation with reading the extended auditor’s report. This was also proven in the main test. However, by hypothesis 1b ‘Financials’ has a positive relation with reading the extended auditor’s report. Furthermore, the independent variables FAR_BAD and FAR_GOOD are more significant than in Table 5.

Table 5

Results of Multiple Regression for Readership EAR

Model 1 Model 2 Model 3 Model 4

Constant (2.90) (2.78) (4.37) (4.23) FAR_BAD 0.06** FAR_GOOD (0.018)** AUD_CHANGE 0.17*** Not Specific (1.88) (2.02) (2.30) (2.03) Energy (1.60) (1.63) (1.92) (1.58) Material (0.23) (0.10)* (0.23) (0.31) Industrial (1.59)** (1.54)** (1.43)* (1.61)** Discretionary Consumers (1.14) (1.15) (1.21) (1.09) Staples Consumers (1.22) (1.38) (1.33) (1.26) Healthcare 0.01* 0.04** 0.02* 0.02** Financials (0.14)* (0.10)* (0.18) (0.35) Information Technology (0.48) (0.53) (0.54) (0.42) Utilities (0.37) (0.34) (0.17)* (0.44) Real Estate (1.65) (1.78)* (1.61) (1.40) Telecom (1.52) (1.28) (1.27) (0.13) Age (0.19) (0.20) (0.14) (0.13) Education (0.57) (0.46) (0.38) (0.50) Knowledge_New_EAR (1.54)*** (1.45)*** (1.41)*** (1.63)*** Read_Finreport (0.88) (1.18) (0.89) (0.70) Info_Bank (0.26) (0.18) (0.09)* (0.41) Newspaper (0.29) (0.21) (0.15) (0.48) Friends (1.04) (1.16) (1.16) (0.93) Scandals (0.14)*** R-Square 0.35 0.34 0.38 0.37 Nonprofessional Investors 101 101 101 101 *** Significant at level 0.01 (p<0.01) ** Significant at level 0.05 (p<0.05) * Significant at level 0.10 (p<0.10)

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VII. DISCUSSION & CONCLUSION

Discussion & Conclusion

Society, especially investors, expects that the auditor is the assurance key for whether the financial statements are fair and true. To show the auditor is trustworthy towards the investors, the extended auditor’s report is published. This research used an online survey that has been answered by 101 nonprofessional investors to answer the main question: To what extent is the decision to read the extended auditor’s report influenced by

financial analysts’ reports, auditor change and industry, from an investor’s perception? To

the best of my knowledge, this is the first survey-based research that is executed in the Netherlands that investigates the relationship between the external influences on reading the extended auditor’s report, from an investor’s point of view.

As implied in the results, when financial analysts report bad news the nonprofessional investor is more likely to read the extended auditor’s report. This is consistent with Smith (2016), the relation between financial analysts and extended auditor’s report has a positive influence on the nonprofessional investor to read the extended auditor’s report. However, our research shows that financial analysts’ reports influence the investor and Smith’s (2016) results indicate that extended auditor’s report influence the financial analysts’ report. When the financial analysts report good news, the investors are more likely to not read the extended auditor’s report. This indicates that nonprofessional investors are more likely to read the extended auditor’s report after bad news than after good news from the financial analysts.

Furthermore, the results of reading the extended auditor’s report, based on financial analyst’s reports is consistent with the Coping theory mentioned in theoretical background. In other words, the nonprofessional investors that answered the related questions follow the Investor’s Adaptation Model. So, if the nonprofessional investors receive bad news their reaction is high control with the outcome risk-return analysis or overreaction, leading them to read the extended auditor’s report. Good news reports from financial analyst influence the nonprofessional investor’s reaction towards low control with the outcome underreaction/self-deception/inaction, leading them to no read the extended auditor’s report.

Findings of this research indicates that nonprofessional investors are more likely to read the extended auditor’s report if an auditor change has occurred. Consistent with the outcomes of the Francis et al. (2017) research, where they found that the auditor change has effect on investor’s decision. A reason for reading the extended auditor’s report after an auditor change, can be explained by the disclosure or different point of view a new accountancy firm may have on the audited organization.

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29 In the Investor’s Adaptation Model, the nonprofessional investors follow the same path in

For the last independent variable, the various industries, there were a few industries significant, but only Healthcare has a positive relation with reading the extended auditor’s report. Meaning that the presence of investing in a Healthcare industry leads towards reading the extended auditor’s report. This means for the industries Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Financials, Information Technology, Telecommunication Services, Utilities and Real Estate have no influence on reading the extended auditor’s report. The reason may be that the Healthcare industry experiences both significant technology changes and government interventions (Chen, Estes & Pratt, 2018). This means that Healthcare industry is not a safe harbor for investments. This could be the reason that investor will read the extended auditor’s report when they invest in Healthcare industry. Chen et al. (2018) prove that investors base their investment decision on auditor’s report. Another reason may be the high R&D costs in the Healthcare industry and low profits in the early years of the healthcare organization. This can lead towards reading the extended auditor’s report, because nonprofessional investors would like know if the auditor gives an assurance for a good future perspective of the organization.

For the Healthcare industry the investors’ outcome in the Investor’s Adaptation Model can be risk-return analysis or overreaction, because Healthcare investors read the extended auditor’s report which subject that they want a high control on bad news.

Concluding, in the introduction these two questions were mentioned as introduction for the main question: But why do the investors only see the auditor’s report as an assurance and do they not actually read the auditor’s report? And what influences give spark to actually reading the auditor’s report by investors? The first question has as answer: the nonprofessional investors have more trust in the financial analysts than in the auditor, based on the answer the respondents give in the survey. For the second question our results show that bad news reports from financial analysts, auditor change and Healthcare industry gives spark to the investor for reading the extended auditor’s report.

Limitations and Direction for Future Research

Similar to other researches, this research has also some limitations that must be taken into account for directions for future research. The first one is related to the small amount of nonprofessional investors that did complete the online survey. This can affect the results because there were three women that filled in the survey, so the online survey is heavily biased towards male. The results may be different when the female/male ratio would be more equal. Also, the age of the respondents could be broader because 84% is older than 50 years old. For a future research, respondents could be selected, so that gender and age is balanced better.