Can Audit Reforms Affect the Information Role of Audits? Evidence from the German Market

Abstract

We investigate whether audit reforms affect the information role of audits in a country where the audit traditionally serves a statutory reporting function. Specifically, we investigate the audit market effects of audit reforms mandated by the German government in the Act on Control and Transparency of Enterprises. We test for differences in the types of audit reports issued, the information content of first time going-concern audit opinions, and the demand for dominant audit suppliers pre and post the implementation of the Act to draw inferences on whether the audit reforms enhanced the information role of German audits. We find an increase in the frequency of modified audit opinions after the audit objective changed from verifying assets in place to identifying and reporting concern uncertainties and non-compliant financial reporting practices. We also find an increase in the information content of first time going-concern audit reports issued after the audit reforms are implemented. In addition, the results also indicate an increase in the demand for dominant audit suppliers in the post-reform years. Moreover, we document a significant increase in the number of auditor lawsuits after the audit reforms went into effect. Collectively, our results suggest that the audit reforms improved the information role of German audits and that German firms responded to the improvement in audit reporting by increasing their demand for dominant audit suppliers.

Keywords: Audit reforms, Audit opinions, Audit market concentration, Auditor liability

JEL Classification: L15, L84, M4, O16