Javad Rajabalizadeh and Hannu Schadewitz
This study investigates the impact of audit reports’ readability on informational efficiency within the Tehran Stock Exchange (TSE), emphasizing challenges in an emerging market…
Abstract
Purpose
This study investigates the impact of audit reports’ readability on informational efficiency within the Tehran Stock Exchange (TSE), emphasizing challenges in an emerging market context characterized by voluntary IFRS adoption and the absence of Big 4 audit firms.
Design/methodology/approach
By utilizing hand-collected data from TSE-listed companies, covering 1,097 firm-year observations from 2012 to 2023, readability is assessed using three well-established indexes (Fog, Flesch–Kincaid and Simple Measure of Gobbledygook). Informational efficiency is evaluated by analyzing how stock prices align with a random walk pattern, with additional control variables including governance factors, auditor characteristics and firm-specific indicators to enhance model robustness.
Findings
The findings indicate a positive association between audit report readability and informational efficiency, suggesting that clearer and more readable audit reports help reduce information asymmetry. Control variables such as board independence and auditor tenure showed significant impacts, supporting the conclusion that governance and auditor-specific factors enhanced informational efficiency. Agency and institutional theories are used to contextualize these findings, especially within TSE’s unique regulatory environment. The study addresses endogeneity with firm fixed effects and sample selection bias through Heckman’s two-stage procedure. The absence of Big 4 auditors in Iran prompted controls for auditor size effects, supporting our findings across different audit market segments.
Research limitations/implications
Limitations include potential omitted variable bias and challenges in generalizing findings beyond the TSE. Despite applying firm fixed effects and Heckman’s two-stage procedure to control for endogeneity, some residual biases may remain.
Practical implications
For regulators, auditors and investors, these findings underscore the value of promoting readability in audit reports to improve informational efficiency, particularly in emerging markets with evolving regulatory standards.
Originality/value
By focusing on audit report readability within an emerging market lacking Big 4 presence, this study offers unique insights into how readability can foster transparency and investor confidence in regions with distinct market dynamics.
Details
Keywords
Javad Rajabalizadeh and Hannu Schadewitz
This study aims to investigate the impact of audit partners’ narcissism on the readability of audit reports for companies listed on the Tehran Stock Exchange (TSE). It examines…
Abstract
Purpose
This study aims to investigate the impact of audit partners’ narcissism on the readability of audit reports for companies listed on the Tehran Stock Exchange (TSE). It examines the effects of narcissism among both lead and review audit partners on the clarity of audit reports, considering the regulatory requirements and auditing practices within the Iranian financial reporting context.
Design/methodology/approach
This paper analyzed 2,691 firm-year observations from TSE-listed companies spanning 2011–2023, using ordinary least squares regression. Readability of audit reports was assessed using the FOG index, with the size of partners’ signatures serving as a proxy for narcissism.
Findings
The findings indicate a significant negative relationship between increased narcissism and audit report readability; higher levels of narcissism correspond with elevated FOG index scores. Narcissism in lead partners notably diminishes readability more than that of review partners. This pattern holds across various robustness checks, including alternative readability metrics, variations in auditor engagement complexity, auditor specialization, subsets of qualified audit reports and considerations for endogeneity. Audit reports for economically significant clients tend to be clearer, suggesting a preference for reputation management over yielding to client pressure. Although no direct link was established between partners’ quality and readability, a positive relationship exists between audit firm rank and partners’ narcissism. Furthermore, interactions between auditor and CEO narcissism increase report complexity, especially in contentious negotiation scenarios. Despite regulatory advancements such as International Auditing Standard 701, its moderating effects were found to be inconsequential, highlighting the persistent influence of narcissism on audit report outcomes.
Originality/value
This research expands the understanding of how auditor personality traits, particularly narcissism, affect audit outcomes. By exploring the influence of narcissism on report readability within the Iranian context, this study fills a notable gap in the literature on emerging markets and non-Western reporting environments, providing valuable insights into global audit practices.