THE RELATIONSHIP BETWEEN TONE AMBIGUITY AND AUDIT EFFORT: EVIDENCE FROM 10-K FILINGS

Abstract

The study investigates the relationship between ambiguous words, particularly uncertain and weak modal words, in 10-K filings and audit fees. The research utilizes a propensity score matching technique to account for endogeneity in client characteristics. The findings suggest that auditors invest more time and effort into analyzing clients' reports containing more ambiguous words and that there is a positive association between the use of these words and audit fees. The study has significant implications for issuers, investors, auditors, and regulators as the clarity of information in the mandatory 10-K report is heavily influenced by the discretion of management. The results suggest that the use of ambiguous words increases audit fees, as they decrease auditors' comprehension of the disclosures, leading to extra audit effort. The study highlights the importance of clear and concise language in financial disclosures to decrease information risk and prevent increased audit fees