The Effects of an Explicit Clarification of Auditor Independence on Equity Analysts’ Confidence in Financial Reporting and Stock Recommendations

Abstract

The Public Company Accounting Oversight Board (PCAOB) recently adopted changes to the auditor’s report to make it more informative and relevant to the public (PCAOB, 2017). One such change is the addition of a statement that explicitly clarifies the auditor’s independence. Our study uses 123 equity analysts, recruited through Qualtrics, and a 2 × 2 between-subjects experimental design, to investigate whether clarification of auditor independence makes any difference to equity analysts’ judgments and confidence in financial reporting. Findings suggest that explicit clarification of auditor independence statement positively impacts analysts’ confidence in financial reporting and judgments.