Communication in Auditors' Reports: Variations in Readability and the Effect of Audit Firm Structure

ABSTRACT

Accounting bodies in most English-speaking countries have recently revised the format of their standard audit reports to make them communicate their message more effectively. This paper examines the readability of audit reports in New Zealand as one element in the communication process. There are statistically significant differences in the readability of audit reports issued by different audit firms and by firms with different audit structures. These differences are consistent with Kaplan, Menon and Williams's (1990) proposal that audit structure is a form of market differentiation. Unstructured audit firms have adapted themselves to clients in unstable environments. The users of the financial reports are more likely to read the auditors' report, and these firms must therefore make their reports more readable. In contrast, structured audit firms are more efficient at auditing clients in stable environments. Users of the financial reports of these clients are more likely to regard auditors' reports as a symbol, and they do not need to be as readable.