New study on the role of auditors

Prof. Dr. Martin Nienhaus (left picture), Christopher Oehler, M.Sc. (right picture)

In an article published in the Review of Accounting Studies, Prof. Dr. Martin Nienhaus and Christopher Oehler from Goethe-University and Christoph Mauritz from Westfälische Wilhelms-Universität Münster report on the results of a study on the role of auditors in the preparation of corporate financial reports. Using the latest methods for automated text analysis and a dataset of nearly 4 million observations, the authors find that the financial reports of two firms become more similar when they share the same auditor. The similarity increases in the dimensions of word choice, content and structure. Moreover, the effect of sharing the same auditor (audit partner) is about nine times stronger than when only sharing the same audit firm. The results are robust to a range of additional tests and sensitivity analyses. Collectively, the study suggests that auditors are involved in the process of preparing their clients' financial reports.

The controversial insight of this study lies in the fact that auditors are generally not allowed to be involved in the preparation of their clients' financial reports in order to ensure an objective audit. Interestingly, however, the results also show that the influence of auditors has a positive effect on the quality of reporting. Moreover, it is especially the small and private firms that are supported in this way in the preparation of financial reports. Additional interview evidence confirms the finding that auditors particularly influence the reporting quality of their small clients, who would otherwise neglect their duties in this area.

The author team also reports on challenges in the DFG-funded research project: "One noteworthy feature of this project was certainly that it was extremely computationally intensive. The machine learning-based text analysis methods as well as the high number of observations meant that one run of the calculations sometimes took one or two weeks. Thus, we always had to plan our analyses very precisely during the course of the project," says Christopher Oehler, for whom the study is part of his cumulative dissertation, describing the procedure.

Since the study was published with open access, interested readers can view and download the article here: