The impact of narcissism, self-confidence and auditor’s characteristics on audit report readability

Mahdi Salehi (Faculty of Economics and Administrative Sciences, Ferdowsi University of Mashhad, Mashhad, Islamic Republic of Iran)
Tamanna Dalwai (Department of Business and Accounting, Muscat College, Muscat, Oman)
Arash Arianpoor (Attar Institute of Higher Education, Mashhad, Islamic Republic of Iran)

Arab Gulf Journal of Scientific Research

ISSN: 1985-9899

Article publication date: 14 December 2022

221

Abstract

Purpose

The present study aims to assess the impact of narcissism, self-confidence and auditor's characteristics on audit report readability for companies listed on the Tehran Stock Exchange.

Design/methodology/approach

The study’s statistical population comprises firms listed on the Tehran Stock Exchange. The present research used a systematic elimination method, and 1,162 firm-year observations were obtained for seven years from 2012 to 2018. Three variables including auditor tenure, audit fee and audit specialization are used for measuring auditing features. The Fog index is used as a proxy for measuring audit report readability. In addition, in this paper, four regressions, including fixed effects, random effects, pooled and T+1, are used to estimate reliable coefficients.

Findings

The findings show a negative and significant relationship between auditor’s characteristics (tenure, fee and specialization) and audit report readability. Moreover, the variables of the auditor’s narcissism, self-confidence and mandatory auditor change have a positive and significant association with audit report readability. This study lends support to the theories of personality disorder and behavioral decision.

Originality/value

Since narcissism and self-confidence are two characteristics that shape an individual’s character and personality, some involved behavioral factors in auditors’ characteristics contribute to their decisions. The effects of these should be detected to enhance the decision-making process. The said factors significantly impact audit report readability. Hence, this paper attempts to assess the effect of the said factors on audit report readability.

Keywords

Citation

Salehi, M., Dalwai, T. and Arianpoor, A. (2022), "The impact of narcissism, self-confidence and auditor’s characteristics on audit report readability", Arab Gulf Journal of Scientific Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/AGJSR-08-2022-0152

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Mahdi Salehi, Tamanna Dalwai and Arash Arianpoor

License

Published in Arab Gulf Journal of Scientific Research. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode


1. Introduction

The financial crisis of 2008–2009 led to wide criticism of financial reporting and external auditors’ reporting of various entities. There have always been two significant challenges ahead of firm managers relative to financial reporting. The first one is balancing financial reporting transparency and avoiding presenting excessive information (due to misuse of rivals). The other is how much information should be delivered, for whom and when (Audousset-Coulier, Jeny, & Jiang, 2016). Given the presence of the financial reporting process, its objective (presenting information to users), and regarding the stance of firms (publishing information as least as possible) and also the costs of financial reporting, including information collection and processing, legal, political and competition costs and costs that limit the behavior of managers, in some cases, it is observed that managers have some confidential information about the firm that brings about information asymmetry. Information asymmetry is one of the considerable criteria for investors who contribute enormously to business firm investments. From most opinion leaders, information asymmetry is the main contributing factor to the stock market’s quality. Any logical decision on buying and selling shares requires accurate information about the quality of the stock market. Audit reports can play a significant role in the process. Financial reporting quality and disclosure policy influence the amount of firm transparency. Besides, firms with no financial health may defer the bad news, leading to a delay in presenting audit reports and audited financial statements. Li (2008) reported that traditional auditor reports fail to satisfy financial statement users’ needs as they lack communication quality and informative value. These factors lead to an audit expectations gap between the auditors’ perception of their responsibilities and the expectations of financial statement users (Bedard et al., 2012, 2016). Annual and auditor reports are characterized by increased length and complexity affecting various stakeholders’ decision-making entities (Velte, 2020). For example, finance and psychology-related research demonstrate biases in the investors’ approach to how the information is conveyed to them (Aymen, Sourour, & Badreddine, 2018; Bonsall & Miller, 2017; Dalwai, Chinnasamy, & Mohammadi Syeeda, 2021; Merkl-Davies, Brennan, & McLeay, 2011). Prior studies have reported that auditor reports are less or very difficult to read, and their readability varies between audit firms (Barnett & Leoffler, 1979; Boritz, Hayes, & Timoshenko, 2016; Velte, 2018, 2020). The audit report source of the business’s annual financial reports is essential, and this report is an inseparable part of the relationship between financial statement users and business economic information (Salehi, Zimon, & Seifzadeh, 2022a). Thus, readability is a critical feature of auditor reports, and it would be useful to investigate the impact of auditor characteristics on this feature.

According to the theory of personality disorders, narcissism refers to a mental and psychological state. One ignores the external setting and conditions of others due to excessive attention to oneself. Narcissism typically includes some beliefs and conditions that include self-arrogance, high expectations of others, justification of one's mistakes, blaming others’ and devaluing others compared with oneself. Narcissistic people are holistic, make others do a detailed analysis, and when they are not satisfied with the regulations, they ignore them and even change them to their benefit. Hence, narcissism is like a double-edged sword that is an excessive amount or an extremely small amount that disrupts the balance (Salehi, Rouhi, Usefi Moghadam, & Faramarzi, 2022b). Since narcissism is a personality characteristic with some signs like the influence of personal desires, asking from others, and prejudice in cognitive processing and contributes to the formation of personality and shapes the behaviors of an individual, some of the involved behavioral factors in the personality of auditors may direct their decisions, the identification of which can enhance the decision-making process. One factor is narcissism and self-confidence among auditors that can influence financial reporting quality, including the readability of annexed notes to financial statements.

The auditing process and its associated auditor efforts are obscure to the public. Thus several features are chosen as proxies to measure this effect (Xu, Fernando, Tam, & Zhang, 2020). For example, auditor fees are interpreted for audit quality, risk and effort (Simunic, 1984). The extant literature findings suggest that lower financial report readability is associated with higher audit risk resulting in higher audit fees (Li, 2008; Lo, Ramos, & Rogo, 2017). Auditor tenure is another feature reported to affect audit quality. Prior studies have suggested that the increase in the length of auditor tenure leads to either a decline in audit quality (González-Díaz, García-Fernández, & López-Díaz, 2015) or increased audit quality (Ghosh & Moon, 2005; Knechel & Vanstraelen, 2007; Jackson, Moldrich, & Roebuck, 2008). Audit firm rotation improves audit quality as the client cannot influence the auditor (Elder, Lowensohn, & Reck, 2015). Alternatively, it may result in substandard audit reports as the auditor does not know the client too well (Carcello & Nagy, 2004; Stanley & DeZoort, 2007). Bae, Choi, and Lee (2019) suggest auditor industry specialization developed through longer engagement hours results in higher audit quality.

Since narcissism and self-confidence are two personality characteristics effective in shaping personality and behavior, some behavioral factors involved in auditors’ personalities may lead to a bias in their decisions and affect audit report quality. Assessing the narcissism and self-confidence of auditors is also among the challenging and attractive issues in financial reporting. It is considered a leading issue regarding the study’s practicality in answering investors’ and managers’ information needs. Thus, the paper is concerned with the effect of factors such as narcissism, self-confidence and auditor characteristics on the auditor’s report readability. To the best of the authors’ knowledge, this has not been investigated in extant literature. Using 166 non-financial firms listed on Tehran Stock Exchange, the data are collected from 2012 to 2018. The results suggest that higher auditor tenure, fee and specialization are associated with less readable audit reports. In contrast, auditor narcissism, self-confidence and mandatory auditor switching increase audit report readability for listed firms in Iran. This study offers insights for policymakers seeking to enhance readability and reduce the annual reports. This study can also inform whether regulators, investors, analysts, auditors and other stakeholders need to consider narcissism, self-confidence and auditor’s characteristics in comprehending the audit report readability.

This study makes several contributions. The results will also help existing theoretical literature on related areas. Moreover, firms’ auditor reports have always been significant resources for making relatively related and accurate decisions. This empirical evidence is critical for firms’ management to exercise mandatory auditor change to improve auditor reports’ readability. The standard setters and market regulators get an insight into the determinants of auditor report readability. Finally, institutional investors would benefit from the findings of this study as the auditor arrangements for listed firms in Iran can effectively mitigate information asymmetry. The results of this paper will help to develop science and knowledge in this field and fill the existing literature gap to show the impact of narcissism, self-confidence and auditor’s characteristics on audit report readability.

The research paper is organized as follows. Section 2 discusses the literature review and hypothesis development for the variables selected in this study. Section 3 presents the research methodology, including data collection, research model and used variables. Section 4 discusses the results and discussion for the research model. Section 5 outlines the study’s conclusion, recommendations and limitations.

2. Theoretical principles and hypothesis development

2.1 Auditing in Iran

The role and nature of auditing are introduced by dominant uncertainties and doubts about reported accounting information quality. Auditing is at the forefront of evaluation, making an opinion about the appropriateness, and finally, giving credit to management claims in financial statements. Society expects the auditing profession to present reports that enhance the reliability and timeliness of disclosed accounting information. If auditing is a supervisory tool with various roles and assuming other conditions are fixed, in that case, an audit report on financial statements should gradually enhance information disclosure quality by increasing the timeliness of accounting information disclosure (Araj, 2015). To maintain professional fame and avoid lawsuits against themselves, auditors seek to raise the audit quality. The quality that determines the audit performance is the function of several factors, including the auditor’s capabilities (like knowledge, experience, adaptation power and technical efficiency) and professional implementation (like independence, objectivity, professional care, conflict of interests and judgment) (Zalata & Roberts, 2017). Financial statements are the most important source of information to reflect the performance results, financial condition and cash flows of business firms, and financial reporting readability are useful for the users (Abernathy, Guo, Kubick, & Masli, 2019). Firms in more corrupt regions tend to disclose less readable financial reports. These firms having more able managers are more likely to obfuscate information in annual reports (Xu, Dao, Wu, & Sun, 2022). However, a few studies have assessed audit report readability. So, the findings of this study may be of interest to regulators seeking out factors influencing firms’ audit report readability.

2.2 Theoretical justification

This research is investigated from a multi-theoretical lens investigating the impact of auditor narcissism, self-confidence and characteristics on auditor report readability using communication theory, social identity theory and behavioral decision theory. Audit reports are a communication tool between its users and auditors. The report indicates the auditor’s examination scope and the conclusions made on the financial statement’s appropriateness (Libby, 1979). From a communication theory perspective, the audit report constitutes messages that the auditor, as a sender, wants to communicate with the receivers, the companies and stakeholders (Suttipun, 2022). The quality of communication is measured in readability (Li, 2008) or content and the tone of audit reports (Loughran & McDonald, 2016). Readability is the effective communication of valuation-relevant information (Loughran & McDonald, 2014), and audit report communications’ effectiveness is partly a function of ease of readability (Salehi et al., 2022a). Readability and understanding of reports are usually of particular complexity (Habib & Hasan, 2020). Since this issue is so important that some researchers have referred to it as a bridge between users and useful decision-making (Setayesh, Kazemnejad, & Zolfaghari, 2012), readability has been considered an essential factor in this study. Prior studies that have used communication theory report traditional annual and audit reports that are difficult to read and offer less user value (Smith & Smith, 1971; Li, 2008). Alternatively, auditor type and fees are positively associated with the level of key audit matters (Suttipun, 2022).

Tajfel and Turner (1979) proposed the social identity theory, in which individuals establish an association with those individuals or firms that can enhance their image and prestige. This behavior extends to narcissists’ motivation to associate themselves with other narcissists wielding power in a group or organization (Grosz, Leckelt, & Back, 2020). Extant literature based on social identity theory reported an increase in auditor identity with audit clients increases auditors’ probability of succumbing to client pressure for income-increasing accounting treatments (Koch & Salterio, 2017; Daoust & Malsch, 2020). Bauer (2014) argues auditor skepticism reduces when there is greater auditor identification with the client leading to the auditor issuing a “benefit of the doubt” on contentious accounting issues. Johnson, Lowe and Reckers (2021) also used social identity theory to report narcissist auditors had lower risk assessment when the CFO had high verbal narcissism.

Behavioral decision theory suggests performance is ascertained by an individual’s experience, knowledge, and ability (Bonner & Lewis, 1990; Libby & Tan, 1995). Auditors gain more experience with longer engagement hours, greater audit practice opportunities and feedback from the reviewers and the external environment. Compared to the auditor with lesser experience, experienced auditors are better known for consistent regulations and substantive decisions (Bedard, 1991). According to Francis and Yu (2009), the experienced auditor ensures the clients’ financial statements before being issued. Thus, an auditor’s experience is positively associated with audit quality (Cheng, Liu, & Chien, 2009; Ye, Cheng, & Gao, 2014).

2.3 Hypotheses development

2.3.1 Auditor narcissism

The narcissism of organizational leaders is one of the study fields in organizational leadership. There are various negative consequences for narcissism, including failure of other managers and staff, the possibility of misusing others and immoral behaviors, ignoring the organization’s external realities and environmental threats and destroying the organizational trust and relations (Rosenthal & Pittinsky, 2006). A narcissistic auditor considers himself the pivotal figure for values and firm achievements and is not afraid of financial reports’ failure. Arrogance and pride will cause them to resist constructive suggestions, give more credit to their success and blame others for failure. Such characteristics will cause problems with their personal and organizational relations. That may ignore necessary organizational inputs, including wise advice, environmental changes (like changes in the market) and rivals’ threats. Moreover, efficient staff may be isolated under such circumstances. The absence of empathy and understanding in narcissistic auditors has made them unpopular among the personnel. Since they need admiration and subservience, obsequious staffs are vital to them. Narcissistic auditors are willing to carry out extraordinary measures to be outstanding, among others. They show a high risk-taking ability to maintain control, power, authority and borderless significance. The resultant narcissism from such behavioral characteristics led to a massive business crisis (Church, Dai, Kuang, & Liu, 2020). Kent, Munro, and Gambling (2006) studied the effect of psychological characteristics on the relationship between auditors’ specialization and auditor’s judgment. They figured out that 14 features contribute to the auditor’s judgment in all auditing procedures. Based on the theory of personality disorder, psychological features include accountability, trust, accepting changes, specialized knowledge, stress control, creativity, etc.

H1.

There is a significant relationship between auditors’ narcissism and audit report readability.

2.3.2 Auditor self-confidence

Self-confidence in accounting is among the major tools and executive features. Unfortunately, an excessive number of people with a high experience level suffer from a lower self-confidence percentage. Although they work assiduously, the success path becomes tougher. A person with stronger self-confidence can deal with difficulties more easily and is more willing to explore the depth of realities and vicissitudes. For example, a successful accountant, auditor and financial manager are not afraid of problems and try endlessly to save more information every day (Nakashima & Ziebart, 2015). On the other hand, the false self-confidence that is a behavioral feature in auditing can have an adverse effect (Salehi et al., 2022b). For example, Gizyatova (2015) shows that an auditor’s self-confidence would lead to insufficient evidence collection. Based on the theory of personality disorder, the second hypothesis of the study is as follows:

H2.

There is a significant relationship between auditors’ confidence and audit report readability.

2.3.3 Auditor characteristics

Auditing and auditor’s characteristics play a significant role in substantiating financial statements. One such feature is the specialization and experience of the auditor. For example, Chen, Lin, and Lin (2008) state that authorized and specialized audit firms positively affect the market share’s gradual growth. Moreover, their study results show that the discretionary accruals of employers of industry-specialized auditors are significantly lower than that of nonspecialized industry auditors. Libby and Frederick (1990) show that the more auditors experience, the more they understand different available distortions in financial statements. Hence, the quality of the auditor’s decision will improve by gaining experience in the field. Thus, the more experienced the auditor, the better will be the provided services to society. Craswell, Francis, and Taylor (1995) also declare that experienced auditors embark on high-quality audits to maintain their credit and fame. One of the other auditing features is the audit fee. Different studies show that audit fee reflects the effective economic cost of auditing within an economy. The price relies on the size, work complexity, risk and other firm features under study and its commercial setting (Cho, Kwon, & Krishnan, 2021). Low audit quality decreases the trust of financial statement users. That not only leads to a failure to achieve the set objectives, but reduces the credibility of the audit process in broad terms, hinders the appropriate allocation of capital in the securities market, and enhances the capital costs and financial supply (Inaam & Khamoussi, 2016). Cho, Hyeon, Jung, and Lee (2022) investigated the auditors’ responses to the readability of annual reports. They found hard-to-read annual reports positively associated with audit fees and hours. However, no empirical association exists between annual report readability and hourly fee rates. These findings imply that while auditors exert additional effort to reduce the audit risk embedded in unclear annual reports, they do not charge a higher fee premium. Auditors’ tenure is one of the other features of auditing. Several studies examined the effect of audit tenure length on audit quality and financial reporting quality (e.g. Deis & Giroux, 1992). The studies yield different results concerning the countries under study’s legal, social, economic, and cultural conditions. For example, Davis, Soo, and Trompeter (2002) indicate that abnormal accruals for earnings management are more frequent in firms with long-term auditing periods.

Besides, Deis and Giroux (1992) observe that audit quality decreases and increases audit tenure. One of the other auditing features is the mandatory change of auditors. From advocates’ view, mandatory auditor change and long auditor tenure may lower impartiality and hurt independence. A decrease in audit quality due to the decline of accuracy in performing control and content tests comes from the similarity between the auditor and the dominant condition. Selecting an auditor is a significant decision about firm age, and deciding about auditor change should be made carelessly (Buntara & Adhariani, 2019). However, auditor change can result from a change in current condition (some irrelevant to the previous audit firm), like a change in top management or disagreement and special issues. So, changing auditors’ reasons is not necessarily related to an audit firm’s specifications and selecting a new auditor (Beattie & Fearnley, 2002). Based on behavioral decision theory and the effect of auditor’s characteristics on audit and reporting quality, it is expected the auditors’ characteristics affect the readability of the auditor’s report, so hypotheses 36 of the study are as follows:

H3.

There is a significant relationship between auditors’ specialization and audit report readability.

H4.

There is a significant relationship between audit fees and audit report readability.

H5.

There is a significant relationship between auditors’ tenure and audit report readability.

H6.

There is a significant relationship between mandatory auditor change and audit report readability.

3. Research methodology

3.1 Data collection

The study’s statistical population includes all listed firms on the Tehran Stock Exchange. The systematic elimination method is used, and data are selected for seven years (2012–2018). In this paper, firms under study were selected using the screening method based on the following conditions:

  1. They should not be affiliated with investment companies, financial intermediaries, holdings, banks, insurance and leasing; and,

  2. Their financial year-end should be set in March.

Given the above conditions, a total number of 166 firms are selected.

3.2 Empirical model and data analysis

Model 1 is used for testing research hypotheses:

(1)ARTit=α0+α1AuditNAit+α2AuditCONit+α3AuditSIZEit+α4AuditCHANGEit+α5AuditFEEit+α6AuditINDit+α7AuditTENUREit+α8MBit+α9SIZEit+α10LEVit+α11ROAit+α12AGEit+α13GROWTHit+Yearit+Industryit+εit

To estimate reliable coefficients, this paper uses four regressions, including fixed effects, random effects, pooled and T+1. The statistical analysis for estimating the model related to narcissism, self-confidence, auditor’s characteristics and auditor’s report readability is done using the Stata software.

3.3 Variables measurement

3.3.1 The dependent variable of the study

ART: the variable of auditor’s report readability, for the measurement of which, according to similar studies (e.g. Lim, Chalmers, & Hanlon, 2018; You & Zhang, 2009; Ajina, Sougne, & Lakhal, 2015) Fog index was used which has been used widely and has seen increased usage in the accounting literature (Lo et al., 2017). The Fog index is a function of two variables of sentence length (based on words) and complicated words (defined in the form of the number of three or multi-syllabus words) and is calculated as follows:

FOGIND=(averagesentencelength+percentageofcomplexwords)×0.4

A higher Fog index indicates that an annual report is harder to read (Cho et al., 2022). The process and manner of determining of financial report’s level of readability in the above index are as follows:

  1. Selecting a 100-word sample from the beginning, a 100-word sample from the middle and a 100-word sample from the end of the report, randomly.

  2. Counting the number of sentences of each sample.

  3. Determining average sentence length by dividing the number of words into the number of complete sentences of each sample of 100-word.

  4. Counting the number of existing three-syllable and more than three-syllable words (complicated words) in each 100-word text.

  5. Adding the number of complicated words with the average number of words in sentences.

  6. Multiplying the number of complicated words and average words in sentences by the fixed figure of 0.4.

  7. Calculating no. 4, 5 and 6 for two other 100-word samples.

  8. Calculate all three samples’ average results by adding and dividing by a number.

The relationship between the Fog index and readability level is as follows: Fog > 18 means the text is not readable and more complicated; 14–18 (hard text), 12–14 (average text), 10–12 (acceptable text) and 8–10 (easy text).

3.3.2 Independent variables of the study

  1. Auditor narcissism measurement

AuditNA: the variable of auditor narcissism, for which the size of auditors’ signature is used. Since signature size correlates with narcissism, we can measure auditor narcissism in a naturally occurring setting (Salehi et al., 2022a; Church et al., 2020). Bigger signatures indicate narcissistic personal characteristics (Salehi et al., 2022a).

  1. Auditor confidence measurement

AuditCON: According to Malmendier and Tate (2005a, b, 2008), to measure managers’ overconfidence, the index of surplus investment in assets is used in this paper. It is calculated by dividing the residual of total asset growth regression (Assets.Grit) by sales growth (Sales. Grit). So that if the residual is greater than 0, this index is equal to one; otherwise to zero. This index is based on the fact that managers invest more than their peers in firms whose assets grow at a higher rate than sales.

(2)Assets.Grit=a0+a1sales.Grit+εit
  1. Auditor characteristics measurement

AuditFEE: the variable of audit fee which is obtained from the natural logarithm of the audit fee (Tarighi, Salehi, Moradi, & Zimon, 2022).

AuditIND: auditor industry specialization. This paper assesses auditor industry specialization using the market share approach since it is more applicable in Iran. According to the approach, a specialized industry auditor is considered when he/she obtains a higher proportion of active clients in that industry than his/her rivals. In this approach, market share is obtained by dividing the firm client’s total sales in each industry into the same industry’s total sales (Minutti-Meza, 2013; Romanus, Maher, & Fleming, 2008).

MarketShareik=j=1Jiksalesijkk=1Ikj=1Jiksalesijk

The numerator is the total sales of all clients of i audit firm in the k industry. The denominator is the total sales of all active firms in the k industry for all audit firms in that industry.

AuditSIZE: the variable is indicative of audit firm size. In this paper, affiliated audit firms with official accounting associations are considered small auditing (small audit firms), so 0 will be assigned to them and the audit organization due to a large number of staff and longer history being considered large auditors and take 1 (Arianpoor & Sahoor, 2022).

AuditTENURE: the variable of auditor tenure is obtained from the years the auditor has worked as an independent auditor (Salehi et al., 2020, 2022a).

AuditCHANGE: The mandatory auditor change variable equals 1 if the auditor has changed; otherwise, 0. (Eshagniya & Salehi, 2017; Salehi et al., 2022a).

3.3.3 Control variables

This study includes several control variables proposed in prior studies (e.g. Salehi et al., 2022a; Church et al., 2020; Dalwai et al., 2021; Suttipun, 2022). In addition, the study includes: return on assets (ROA), which is equal to net profit divided by total assets; firm size (SIZE), the natural logarithm of firm assets; firm age (AGE), which is equal to the time of firm presence in the stock exchange; market value to book value of capital (MB) that is calculated by dividing market value of equity to book value; sales growth (GROWTH) that is equal to the sales of this year minus that of the previous year divided by sales of the previous year; Year, dummy variable for year; Industry, the dummy variable for the industry. The summary of measuring all research variables is presented in Appendix 1.

4. Findings

4.1 Descriptive statistics and correlation analysis

Table 1 illustrates the information related to the research model variables, including the number of observations, mean, standard deviation, minimum and maximum.

As shown in Table 1, the natural logarithm of audit fees by the value of 1401.833 has the highest mean among the variables. The minimum standard deviation is related to the variable of sales growth by 0.123, and the highest standard deviation is for the natural logarithm of audit fee by 1235.795. The minimum value is for the variable of return on equity by −72.696, and the highest value is 121.510 for market value to book value of equity in 2004.

The sensitivity analysis test assesses the relationship between the used variables in model two-by-two, the above matrix’s output. Since it analyzes the correlation between the variable and itself, this matrix’s diameter is always 1. This means complete correlation and the more the figures closer to 1, the higher the correlation, and the closer the figures are to 0, the lower the correlation. Thus, the correlation interval is between −1 and +1, where negative figures show an inverse correlation and positive figures indicate a direct correlation. Table 2 illustrates the results of the sensitivity analysis of the research variables.

4.2 Results

Table 3 shows information related to the normality test of the variables’ model.

Regarding the normality test results, AuditFEE, AGE, MB, ROA and AuditCON have had no normal distribution, and the mode’s remaining variables experienced a normal distribution. There are several methods for normalizing variables, but applying these methods is a factor in the failure of relations among model variables, so they are dismissed. It is specified that all variables are at no unit root level (stationary) by assessing the unit root for variables. The obtained LM statistic for each variable is reported in Table 4.

One of the methods for detecting linearity is using the VIF test. Rj2 in these two criteria, the coefficient of determination of jth descriptive regression on other descriptive variables. The linearity is probable if the tolerance is smaller than 0.2 or VIF is larger than 10. Table 5 depicts the results of the test.

To estimate the model, first, we should analyze whether the data are pooled or panel using the F test. This test’s null hypothesis expresses that data are pooled, and hypothesis 1 declares that data are panel. After performing the F test, H0 is rejected. The question is that based on which models of fixed or random effects, the model is analyzable, determined by the Hausman test. The null hypothesis concerning the pooled data is ejected regarding the pooled test results reported in Table 6. Hence, the model with panel data should be used to estimate the model’s coefficients.

According to Table 7, the Hausman test statistic based on the first model’s estimation is equal to 7.20, larger than χ2 in the table, so the null hypothesis is rejected. Hence, the model with a fixed effect is more appropriate for the research model.

Given the pooled and Hausman tests’ results, the study’s main model should be estimated using the panel data method with random effects. The results of the estimation are reported in Table 8.

Table 8 shows a negative and significant relationship between auditors’ narcissism and auditor’s report readability because the coefficient is −4.469 and significant at a 99% confidence level. On the other hand, since the coefficient of the auditor’s self-confidence coefficient is −0.353 and its probability level is 0.000, there is a negative and significant relationship between the auditor’s self-confidence and report readability. Besides, since the auditor’s mandatory change coefficient is −2.191, there is a negative and significant relationship between mandatory auditor change and the auditor’s report readability at 99% confidence. There is also a positive and significant relationship between the auditor’s specialization, fee, tenure and auditor’s report readability. Since their probability level is 0.004, 0.013 and 0.000 with coefficients of 9.966, 0.007 and 0.131, they are involved in fixed effects regression of year and industry dummy variables. The dummy variables of the industry are eliminated due to linearity and insignificance.

The first regression is estimated using the fixed effects method to confirm and obtain robust results. The results of the estimation are presented in Table 9.

As shown in Table 9, the coefficients of narcissism, self-confidence, and mandatory auditor change are −2.312, −0.0909 and −4.310, respectively, with a probability level of 0.000. Thus, similar to fixed effects regression, there is a negative and significant relationship between narcissism, self-confidence, mandatory auditor change and auditor report readability. On the other hand, the coefficients of auditor’s fee, specialization and tenure are 0.006, 10.714 and 1.407, with respective probability levels of 0.027, 0.009 and 0.059. Hence, there is a positive and significant relationship between auditor’s fee, specialization, tenure and auditor’s report readability.

Following the estimation of robust results, the desired model is estimated in the form of OLS data. That means no distinction is considered among existing firms in the data sample. Before estimating the model, we first assessed heterogeneity variance among disruptive components. Regarding the obtained results in Table 10, the chi-square statistic is 21.77 higher than the table value at 99%, so the null hypothesis for variance homogeneity is rejected. Therefore, the first model’s disruptive component is heterogeneous variance, and the feasible generalized least squares (FGLS) method is used.

Given the homogeneity variance analysis results for model residuals, the generalized least squares regression method cannot be used due to the violation of the classic hypothesis of variance homogeneity.

As shown in Table 11, the FGLS method is used, the results of which are indicative of a negative and significant relationship between narcissism, self-confidence, and mandatory change of auditor and auditor’s report readability because the coefficients of them are negative values of −3.432, −0.645 and −6.368 with a respective probability level of 0.026, 0.001 and 0.021. On the other hand, there is a negative and significant relationship between audit fees and auditor’s report readability regarding the probability level of 0.000 and coefficient of −0.009. Moreover, there is a positive and significant relationship between the auditor’s specialization and report readability, with a probability level of 0.053 and a coefficient of 2.790 at 90%. Further, there is a positive and significant relationship between auditor tenure and auditor’s report readability since the positive value coefficient is 5.865 with a probability level of 0.012.

T+1 regression is used to assess the model’s delayed effect of descriptive variables on the dependent variable for the auditor’s report readability variable. Table 12 shows these variables’ effects to obtain the model’s coefficients of descriptive variables using the fixed/random effects method. The regression aims to estimate the effect of two key descriptive variables of the auditor’s narcissism and self-confidence on the auditor’s report readability for the upcoming period. Since the probability level of these two variables is 0.043 and 0.036 and their coefficients are −4.115 and −1.133, the regression results show a negative and significant relationship (at 95% level) between narcissism self-confidence and auditor’s report readability of the upcoming period. Further, audit firms’ size, mandatory change of auditor, firm size and financial leverage negatively and significantly affect the auditor’s report readability in the upcoming period. Moreover, the AuditFEE, auditor industry specialization, market value to book value of capital, return on assets and firm sales growth in the current period have an incremental effect on the auditor’s report readability in the upcoming period.

5. Discussion and conclusion

This paper uses the generalized least squares regression to assess the relationship between narcissism, self-confidence, auditor characteristics and audit report readability. This paper comprises different aspects of narcissism, self-confidence and auditor’s characteristics and their effect on an auditor’s report readability by considering the readability quality. All hypotheses of the study are confirmed. The results show a significant relationship between an auditor’s narcissism and audit report readability. Narcissism and overconfidence are psychological disorders, showing self-superiority and being at the center of attention (Tamborski, Brown, & Chowning, 2012). These persons gain personal benefits and do not mind the presented rules and regulations, making them complicated (Capalbo, Frino, Lim, Mollica, & Palumbo, 2018). This will decline readability (Bloomfield, 2008). Therefore, it can be claimed that this psychological disorder can influence the audit report’s readability. Based on behavioral decision theory, it is expected that the audit report readability plays an important role in understanding by users; however, the report readability reports vary and are influenced by the auditor’s and client’s characteristics. The results of Abbaszadeh, Salehi and Nasimtoosi (2019) showed the most important variables determining the readability of the audit report are the auditor’s size (negative effect), auditing consolidated/not consolidated financial statement (Consolidated one is less readable), size of the client (negative effect), the ratio of market to book value of client (positive effect) and auditor’s report type (an adjusted report is less readable). In addition, audit report delay will reduce audit report readability. Xu et al. (2020) showed that while poor readability increases the fees charged by the auditor, higher audit fees improve the readability of the financial reports. Cho et al. (2022) also showed that the association between annual report readability and audit variables (i.e. audit fees and hours) is most salient at the initial engagement but becomes weaker as the auditor tenure increases.

According to the obtained results from the study, it is highly recommended to use renowned firms to carry out efficient audits. The existing gap in the variables under study will be filled by achieving the above objectives. The obtained results will also benefit existing theoretical literature in related areas.

The findings of this study have practical implications for managers, shareholders, investors, regulators and auditors. First, the shareholders and investors can note this study’s results to understand the association between auditor characteristics and an audit report’s readability. For instance, poor financial report readability encumbers firms’ stakeholders (Xu et al., 2020); hence, understanding the interaction between audit report readability and audit fees will help auditors and firm managers. Second, the auditors can use the results to monitor audit reports’ readability and auditor characteristics affecting the same. Third, auditing firms can monitor the auditor characteristics such as narcissistic behavior and self-confidence to mitigate information asymmetries from difficult-to-read audit reports. Finally, the theoretical contributions of this study are useful for research scholars. There is support for communication, social identity and behavioral decision theories. The increase in narcissistic behavior lowers audit report readability suggesting auditor skepticism and further evidence for social identity theory. Similarly, experienced auditors in Iran improve audit reports’ readability in line with the behavioral decision theory. The findings of this study can lead to the literature development of the previous studies concerning audit reporting linguistics and auditor characteristics in emerging markets in Iran and developing countries. In addition, the results of this study can present new ideas for conducting new studies in the field of auditor characteristics and audit report styles of business firms.

The study suffers from some limitations. Given the high volume of auditor’s reports, we could not assess the provided texts. In addition, this study considered textual characteristics to calculate audit report readability, and no comprehensive and smart software was available to assess Persian texts’ readability. Thus, readability measurement was possible by coding in the PHP language. Still, due to a dictionary’s unavailability on the number of Persian words’ syllabus, the definition of complex words has inevitably changed from three-syllable words to six or more syllables. Moreover, there was no access to the text files of auditor’s reports for measuring the readability before 2012; thus, it has limited our study on the reassessment effect of 700 audit standards on auditor’s reports readability. On the other hand, the Fog index was used in this research to measure report readability. Thus, using different proxies (e.g. the text length index and the Flesch Reading Ease index) to calculate report readability can lead to different findings. Future studies can investigate these characteristics for longer durations to ensure their impact. It is further recommended that a similar study is extended to financial sector firms to understand the impact of auditor characteristics on the readability of audit reports.

The results of descriptive statistics

VariableMeanStd. devMinMax
ART4832.2060264
AuditNA0.2690.44401
AuditCON0.5470.49801
AuditSIZE0.2080.40601
AuditCHANGE0.2750.44701
AuditFEE1401.8331235.795777590
AuditIND0.50.50001
AuditTENURE3.6960.3552.5654.985
MB2.4946.511−53.218121.510
SIZE1.164.243.66010.87
LEV0.6590.2580.1312.658
ROA0.1000.163−1.1580.622
AGE41.48612.0061367
GROWTH0.1810.1230.0190.717

Note(s): Table 1 illustrates the information related to the research model variables, including the number of observations, mean, standard deviation, minimum and maximum. ART is auditor’s report readability; AuditNA is auditor narcissism; AuditCON is auditor confidence; AuditSIZE is audit firm size; AuditCHANGE is auditor change; AuditFEE is audit fee; AuditIND is auditor industry specialization; AuditTENURE is auditor tenure; MB is market value to book value of capital; SIZE is firm size; LEV is leverage; ROA is return on assets; AGE is firm’s age; GROWTH is sales growth of a firm

The results of sensitivity analysis of variables

ARTAuditNAAuditCONAuditSIZEAuditCHANGEAuditFEEAuditIND
ART1.000
AuditNA−0.0431.000
AuditCON0.0150.0261.000
AuditSIZE−0.011−0.017−0.0081.000
AuditCHANGE−0.0590.037−0.035−0.2151.000
AuditFEE−0.037−0.183−0.0390.130−0.0101.000
AuditIND0.030−0.0640.0160.462−0.1320.1591.000
AuditTENURE−0.0480.0690.0220.0930.0030.0970.107
MB0.005−0.0170.0330.104−0.0590.0170.042
SIZE−0.071−0.103−0.0670.0110.0530.0480.063
LEV−0.0310.0860.0040.1840.0630.077−0.046
ROA0.055−0.1440.029−0.074−0.069−0.0610.062
AGE−0.0870.0310.0630.066−0.0050.1060.022
GROWTH0.013−0.0750.025−0.0460.0100.058−0.214
AuditTENUREMBSIZELEVROAAGEGROWTH
AuditTENURE1.000
MB0.0271.000
SIZE−0.0130.0271.000
LEV0.044−0.0510.0651.000
ROA−0.0470.052−0.066−0.7271.000
AGE0.7980.022−0.0300.0120.0141.000
GROWTH−0.0460.0830.0150.098−0.239−0.0571.000

Note(s): Table 2 is a sensitivity analysis test assessing the model’s relationship between used variables

The results of the normality test of variables

VariableLevelVariableLevel
ART0.627AuditNA1.000
AuditCON0.000AuditSIZE1.000
AuditCHANGE1.000SIZE0.326
AuditIND1.000AuditFEE0.080
AuditTENURE0.502GROWTH0.182
ROA0.094LEV0.509
MB0.008AGE0.087

Note(s): Table 3 shows information related to the normality test of the variables’ model

The results of the Hadri unit root test

VariableLevelVariableLevel
ART0.9748AuditNA0.5214
AuditCON0.2157AuditSIZE0.9647
AuditCHANGE0.3148SIZE0.1182
AuditIND0.4287AuditFEE0.514
AuditTENURE0.2793GROWTH0.7168
ROA0.9999LEV0.2879
MB0.9812AGE0.1723

Note(s): The obtained LM statistic for each variable is reported in Table 4. The null hypothesis is the absence of unit roots in variables

The results of the linearity test

VariableVIF1/VIF
AuditTENURE2.880.348
AGE2.860.350
ROA2.360.424
LEV2.290.437
AuditIND1.440.697
AuditSIZE1.430.697
GROWTH1.170.854
AuditNA1.100.909
AuditFEE1.090.913
AuditCHANGE1.070.936
SIZE1.030.968
MB1.030.970
AuditCON1.020.979
Mean VIF1.60

Note(s): Table 5 depicts the results of the linearity

The results of the pooled test

Calculated statisticProbability level
Research model8.140.000

Note(s): Table 6 is to estimate the model using the F test

The results of the Hausman test

Calculated statisticProbability level
Research model7.200.844

Note(s): Table 7 is the Hausman test. Given the pooled and Hausman tests’ obtained results, the study’s main model should be estimated using the panel data method with random effects

The results of model estimation

VariableCoefficientStandard deviationZ statisticp-value
AuditNA−4.4691.204−3.710.000
AuditCON−0.3530.051−6.970.000
AuditSIZE−0.0150.129−14.850.000
AuditCHANGE−2.1910.623−3.520.000
AuditFEE0.0070.0032.480.013
AuditIND9.9663.4372.900.004
AuditTENURE0.1310.0158.450.000
MB−0.0480.0011.900.057
SIZE0.0054.20−1.180.237
LEV−0.0710.200−1.680.093
ROA−0.0310.2317.730.000
AGE0.0550.015−6.530.000
GROWTH−0.0870.1201.700.091
_cons0.01318.3832.740.006
Adjusted R20.5486
Wald χ221.52
p-value0.063

Note(s): Table 8 shows the relationship between auditors’ narcissism and auditor’s report readability because the coefficient is −4.469 and significant at a 99% confidence level. Since the auditor’s self-confidence coefficient is −0.353 and its probability level is 0.000, there is a negative and significant relationship between the auditor’s self-confidence and report readability. Besides, since the auditor’s mandatory change coefficient is −2.191, there is a negative and significant relationship between mandatory auditor change and the auditor’s report readability at 99% confidence. There is also a positive and significant relationship between the auditor’s specialization, fee, tenure and auditor’s report readability. Since their probability level is 0.004, 0.013, and 0.000 with coefficients of 9.966, 0.007 and 0.131, they are involved in fixed effects regression of year and industry dummy variables

The results of fixed effects model estimation

VariableCoefficientStandard deviationZ statisticp-value
AuditNA−2.3120.622−3.720.000
AuditCON−0.9090.217−4.190.000
AuditSIZE−1.3430.236−5.700.000
AuditCHANGE−4.3101.201−3.590.000
AuditFEE0.0060.0032.240.027
AuditIND10.7144.0782.630.009
AuditTENURE1.4070.7441.890.059
MB0.0290.0112.610.009
SIZE−4.672.69−1.740.083
LEV−3.7142.237−1.660.097
ROA5.5331.0185.430.000
AGE0.6780.7440.910.363
GROWTH0.1740.0374.750.000
_cons27.20435.1900.770.440
Adjusted R20.5186
F test1.80
p-value0.042

Note(s): Table 9 shows the coefficients of narcissism, self-confidence and mandatory auditor change are −2.312, −0.0909 and −4.310, respectively, with a probability level of 0.000. Thus, similar to fixed effects regression, there is a negative and significant relationship between narcissism, self-confidence, mandatory auditor change and auditor report readability. On the other hand, the coefficients of auditor’s fee, specialization, and tenure are 0.006, 10.714 and 1.407, with respective probability levels of 0.027, 0.009 and 0.059. Hence, there is a positive and significant relationship between auditor’s fee, specialization, tenure and auditor’s report readability

The results of the heterogeneity variance test

Test nameX2 statisticp-value
Breusch–Pagan21.770.000

Note(s): Table 10 shows heterogeneity variance among disruptive components. Regarding the obtained results in Table 10, the Chi-Square statistic is 21.77 higher than the table value at 99%, so the null hypothesis for variance homogeneity is rejected. Therefore, the first model’s disruptive component is heterogeneous variance

The estimation results of the feasible generalized least squares model

VariableCoefficientStandard deviationZ statisticp-value
AuditNA−3.4321.538−2.230.026
AuditCON−0.6450.190−3.390.001
AuditSIZE−2.7631.632−1.690.091
AuditCHANGE−6.3682.761−2.310.021
AuditFEE−0.0090.0024.150.000
AuditIND2.7901.4451.930.053
AuditTENURE5.8652.3272.520.012
MB0.0520.0271.920.055
SIZE−5.673.44−1.650.100
LEV−4.6452.646−1.760.079
ROA15.18513.5181.120.261
AGE−0.3720.202−1.840.066
GROWTH0.8090.2293.530.000
_cons35.92620.7211.730.083
Wald χ2154.28
p-value0.000

Note(s): Table 11 shows the feasible generalized least squares (FGLS) method. The results indicate a negative and significant relationship between narcissism, self-confidence, and mandatory change of auditor and auditor’s report readability because their coefficients are negative values of −3.432, −0.645 and −6.368 with respective probability levels of 0.026, 0.001 and 0.021. On the other hand, there is a negative and significant relationship between audit fees and auditor’s report readability regarding the probability level of 0.000 and coefficient of −0.009. Moreover, there is a positive and significant relationship between the auditor’s specialization and the auditor’s report readability, with a probability level of 0.053 and a coefficient of 2.790 at 90%. Further, there is a positive and significant relationship between auditor tenure and auditor’s report readability since the positive value coefficient is 5.865 with a probability level of 0.012

The results of T+1 model estimation for auditor’s report readability

VariableCoefficientStandard deviationZ statisticp-value
AuditNA−4.1152.028−2.030.043
AuditCON−1.1330.541−2.100.036
AuditSIZE−5.5422.882−1.920.055
AuditCHANGE−2.4491.118−2.190.036
AuditFEE0.0010.0012.240.025
AuditIND10.1242.6653.800.000
AuditTENURE−6.5604.291−1.530.126
MB0.1710.0971.770.077
SIZE−8.765.18−1.690.091
LEV−0.1240.029−4.260.000
ROA1.8110.7192.520.012
AGE0.1870.1291.450.148
GROWTH0.0460.0261.730.085
_cons16.71013.1191.270.203
Adjusted R20.4204
Wald χ224.94
p-value0.023

Note(s): Table 12 shows the T+1 regression used to assess the model’s delayed effect of descriptive variables on the dependent variable. Table 12 shows these variables’ effects to obtain the model’s coefficients of descriptive variables using the fixed/random effects method. Since the probability level of these two variables is 0.043 and 0.036 and their coefficients are −4.115 and −1.133, the regression results show a negative and significant relationship (at 95% level) between narcissism self-confidence and auditor’s report readability of the upcoming period. Further, audit firms’ size, mandatory change of auditor, firm size, and financial leverage negatively and significantly affect the auditor’s report readability in the upcoming period. Moreover, the AuditFEE, auditor industry specialization, market value to book value of capital, return on assets, and firm sales growth in the current period have an incremental effect on the auditor’s report readability in the upcoming period

VariableSymbolMeasurementSource
Dependent variables
Auditor’s report readabilityARTTwo indices are used; the first index is the readability of annexed notes, called the Fog index. The Fog index is a function of two variables of sentence length (based on words) and complicated words (defined as the number of three or multi-syllabus words). Fog index = (average no. of words in each sentence + percentage of complicated words) * 0.4
The second index for financial reporting readability is text length (IND LENGTH), which is calculated as follows
Text length index = Ln number of text words
Lim et al. (2018), You and Zhang (2009), Ajina et al. (2015)
Independent variables
Auditor narcissismAuditNASince signature size correlates with narcissism, we can measure auditor narcissism in a naturally occurring settingChurch et al. (2020), Salehi et al., (2022a)
Auditor confidenceAuditCONThe index of surplus investment in assets is used in this paper. It is calculated by dividing the residual of total asset growth regression (Assets.Grit) by sales growth (Sales. Grit). So that if the residual is greater than 0, this index is equal to one; otherwise to zero. This index is based on the fact that managers have more investment than their peers in firms whose assets grow at a higher rate than sales
Assets.Grit=a0+a1sales.Grit+εit
Malmendier and Tate (2005a, b, 2008)
Audit firm sizeAuditSIZEAffiliated audit firms with official accounting associations are considered small auditing (small audit firms), so 0 will be assigned to them and the audit organization due to a large number of staff and longer history being considered large auditors and take 1Arianpoor and Sahoor (2022)
Auditor changeAuditCHANGE1 if the auditor has changed; otherwise, 0Eshagniya and Salehi (2017), Salehi et al. (2022a)
Audit feeAuditFEEAudit fee which is obtained from the natural logarithm of the audit feeTarighi et al. (2022)
Auditor industry specializationAuditINDAuditor industry specialization is assessed using the market share approach since it is more applicable in Iran
MarketShareik=j=1Jiksalesijkk=1Ikj=1Jiksalesijk
The numerator is the total sales of all clients of i audit firm in the k industry. The denominator is the total sales of all active firms in the k industry for all audit firms in that industry
Minutti-Meza (2013)
Auditor tenureAuditTENUREIt is obtained from the number of years the auditor has worked as an independent auditorSalehi et al. (2020), Salehi et al. (2022a)
Control variables
Market value to book value of capitalMBIt is calculated by dividing the market value of equity by the book valueSalehi et al. (2022b)
Firm sizeSIZENatural logarithm of firm assetsArianpoor and Sahoor (2022), Salehi et al. (2022a)
LeverageLEVTotal liabilities to total assetsArianpoor and Sahoor (2022), Salehi et al. (2022a)
Return on assetsROANet profit divided by total assetsSalehi et al. (2022a)
Firm’s ageAGEIt is equal to the time interval between the firm establishment date and the year under studyArianpoor and Sahoor (2022), Salehi et al. (2022a)
Sales growth of a firmGROWTHThe percentage of net sales growthArianpoor and Sahoor (2022), Salehi et al. (2022a)
Dummy variables
Year fixed effectYEAR
Industry fixed effectINDUSTRY

Appendix 1 Measuring the research variables

References

Abbaszadeh, M. R., Salehi, M., & Nasimtoosi, F. (2019). A study of factors affecting readability of the audit report: A linguistic approach. Empirical Studies in Financial Accounting, 16(64), 3157.

Abernathy, J. L., Guo, F., Kubick, T. R., & Masli, A. (2019). Financial statement footnote readability and corporate audit outcomes. Auditing: A Journal of Practice and Theory, 38(2), 126.

Ajina, A., Sougne, D., & Lakhal, F. (2015). Corporate disclosures, information asymmetry and stock-market liquidity in France. Journal of Applied Business Research, 31(4), 12231238.

Araj, F. G. (2015). Responding to fraud risk. Altamonte Springs, FL: The Institute of Internal Auditors Research Foundation (IIARF).

Arianpoor, A., & Sahoor, Z. (2022). The impact of business strategy and annual report readability on financial reporting quality. Journal of Asia Business Studies. doi: 10.1108/JABS-10-2021-0439.

Audousset-Coulier, S., Jeny, A., & Jiang, L. (2016). The validity of auditor industry specialization measures. Auditing: A Journal of Practice and Theory, 35(1), 139161.

Aymen, A., Sourour, B. S., & Badreddine, M. (2018). The effect of annual report readability on financial analysts’ behavior. Journal of Economics Finance and Accounting, 5(1), 2637.

Bae, G. S., Choi, S. U., & Lee, J. E. (2019). Auditor industry specialization and audit pricing and effort. AUDITING: A Journal of Practice and Theory, 38(1), 5175.

Barnett, A., & Leoffler, K. (1979). Readability of accounting and auditing messages. The Journal of Business Communication (1973), 16(3), 4959.

Bauer, T. D. (2014). The effects of client identity strength and professional identity salience on auditor judgments. The Accounting Review, 90(1), 95114.

Beattie, V., & Fearnley, S. (2002). Auditor independence and non-audit services: A literature review. London: Institute of Chartered Accountants in England & Wales.

Bedard, J. (1991). Expertise and its relation to audit decision quality. Contemporary Accounting Research, 8(1), 198222.

Bedard, J. C., Sutton, S. G., Arnold, V., & Phillips, J. R. (2012). Another piece of the “expectations gap”: What do investors know about auditor involvement with information in the annual report? Current Issues in Auditing, 6(1), A17A30.

Bedard, J., Coram, P., Espahbodi, R., & Mock, T. J. (2016). Does recent academic research support changes to audit reporting standards? Accounting Horizons, 30(2), 255275.

Bloomfield, R. (2008). Discussion of ‘annual report readability, current earnings, and earnings persistence’. Journal of Accounting and Economics, 45(2-3), 248252.

Bonner, S. E., & Lewis, B. L. (1990). Determinants of auditor expertise. Journal of Accounting Research, 28, 120.

Bonsall, S. B., & Miller, B. P. (2017). The impact of narrative disclosure readability on bond ratings and the cost of debt. Review of Accounting Studies, 22(2), 608643.

Boritz, J. E., Hayes, L., & Timoshenko, L. M. (2016). Determinants of the readability of SOX 404 reports. Journal of Emerging Technologies in Accounting, 13(2), 145168.

Buntara, A. A., & Adhariani, D. (2019). Audit tenure and audit quality: The renewal sense of comfort? Australasian Accounting, Business and Finance Journal, 13(4), 4662.

Capalbo, F., Frino, A., Lim, M. Y., Mollica, V., & Palumbo, R. (2018). The impact of CEO narcissism on earnings management. Abacus, 54(2), 210226.

Carcello, J. V., & Nagy, A. L. (2004). Audit firm tenure and fraudulent financial reporting. Auditing: A Journal of Practice and Theory, 23(2), 5569.

Chen, C. Y., Lin, C. J., & Lin, Y. C. (2008). Audit partner tenure, audit firm tenure, and discretionary accruals: Does long auditor tenure impair earnings quality? Contemporary Accounting Research, 25(2), 415445.

Cheng, Y. S., Liu, Y. P., & Chien, C. Y. (2009). The association between auditor quality and human capital. Managerial Auditing Journal, 24(6), 523541.

Cho, M., Hyeon, J., Jung, T., & Lee, W. J. (2022). Audit pricing of hard-to-read annual reports. Asia-Pacific Journal of Accounting and Economics, 29(2), 547572.

Cho, M., Kwon, S. Y., & Krishnan, G. V. (2021). Audit fee lowballing: Determinants, recovery, and future audit quality. Journal of Accounting and Public Policy, 40(4). doi: 10.1016/j.jaccpubpol.2020.106787.

Church, B. K., Dai, N. T., Kuang, X., & Liu, X. (2020). The role of auditor narcissism in auditor-client negotiations: Evidence from China. Contemporary Accounting Research, 37(3), 17561787.

Craswell, A. T., Francis, J. R., & Taylor, S. L. (1995). Auditor brand name reputations and industry specializations. Journal of Accounting and Economics, 20(3), 297322.

Dalwai, T., Chinnasamy, G., & Mohammadi Syeeda, S. (2021). Annual report readability, agency costs, firm performance: An investigation of Oman’s financial sector. Journal of Accounting in Emerging Economies, 11(2), 247277.

Daoust, L., & Malsch, B. (2020). When the client is a former auditor: Auditees’ expert knowledge and social capital as threats to staff auditors’ operational independence. Contemporary Accounting Research, 37(3), 13331369.

Davis, L. R., Soo, B., & Trompeter, G. (2002). Auditor tenure, auditor independence and earnings management. Boston College: Documento de trabalho.

Deis, D. R. Jr., & Giroux, G. A. (1992). Determinants of audit quality in the public sector. Accounting Review, 67(3), 462479.

Elder, R. J., Lowensohn, S., & Reck, J. L. (2015). Audit firm rotation, auditor specialization, and audit quality in the municipal audit context. Journal of Governmental and Nonprofit Accounting, 4(1), 73100.

Eshagniya, A., & Salehi, M. (2017). The impact of financial restatement on auditor changes: Iranian evidence. Asia Pacific Journal of Innovation and Entrepreneurship, 11(3), 366390.

Francis, J. R., & Yu, M. D. (2009). Big 4 office size and audit quality. The Accounting Review, 84(5), 15211552.

Ghosh, A., & Moon, D. (2005). Auditor tenure and perceptions of audit quality. The Accounting Review, 80(2), 585612.

Gizyatova, A. (2015). Crisis of confidence in auditors: Russian experience. Procedia Economics and Finance, 25, 2631.

González-Díaz, B., García-Fernández, R., & López-Díaz, A. (2015). Auditor tenure and audit quality in Spanish state-owned foundations. Revista de Contabilidad, 18(2), 115126.

Grosz, M. P., Leckelt, M., & Back, M. D. (2020). Personality predictors of social status attainment. Current Opinion in Psychology, 33, 5256.

Habib, A., & Hasan, M. M. (2020). Business strategies and annual report readability. Accounting and Finance, 60(3), 25132547. doi: 10.1111/acfi.12380.

Inaam, Z., & Khamoussi, H. (2016). Audit committee effectiveness, audit quality and earnings management: A meta-analysis. International Journal of Law and Management, 58(2), 179196.

Jackson, A. B., Moldrich, M., & Roebuck, P. (2008). Mandatory audit firm rotation and audit quality. Managerial Auditing Journal, 23(5), 420437.

Johnson, E. N., Lowe, D. J., & Reckers, P. M. J. (2021). The influence of auditor narcissism and moral disengagement on risk assessments of a narcissistic client CFO. Journal of Accounting and Public Policy, 40(4). doi: 10.1016/j.jaccpubpol.2021.106826.

Kent, P., Munro, L., & Gambling, T. (2006). Psychological characteristics contributing to expertise in audit judgment. International Journal of Auditing, 10(2), 125141.

Knechel, W. R., & Vanstraelen, A. (2007). The relationship between auditor tenure and audit quality implied by going concern opinions. AUDITING: A Journal of Practice and Theory, 26(1), 113131.

Koch, C., & Salterio, S. E. (2017). The effects of auditor affinity for client and perceived client pressure on auditor proposed adjustments. The Accounting Review, 92(5), 117142.

Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2-3), 221247.

Libby, R. (1979). Bankers’ and auditors’ perceptions of the message communicated by the audit report. Journal of Accounting Research, 17(1), 99122.

Libby, R., & Frederick, D. M. (1990). Experience and the ability to explain audit findings. Journal of Accounting Research, 28(2), 348367.

Libby, R., & Tan, H. (1995). The role of knowledge and memory in audit judgment. Judgment and Decision-Making Research in Accounting and Auditing, 1, 176206.

Lim, E. K., Chalmers, K., & Hanlon, D. (2018). The influence of business strategy on annual report readability. Journal of Accounting and Public Policy, 37(1), 6581.

Lo, K., Ramos, F., & Rogo, R. (2017). Earnings management and annual report readability. Journal of Accounting and Economics, 63(1), 125.

Loughran, T., & McDonald, B. (2014). Measuring readability in financial disclosures. The Journal of Finance, 69(4), 16431671.

Loughran, T., & McDonald, B. (2016). Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), 11871230.

Malmendier, U., & Tate, G. (2005a). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 26612700.

Malmendier, U., & Tate, G. (2005b). Does overconfidence affect corporate investment? CEO overconfidence. European Financial Management, 11(5), 649659.

Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89(1), 2043.

Merkl-Davies, D. M., Brennan, N. M., & McLeay, S. J. (2011). Impression management and retrospective sense-making in corporate narratives: A social psychology perspective. Accounting, Auditing and Accountability Journal, 24(3), 315344.

Minutti-Meza, M. (2013). Does auditor industry specialization improve audit quality? Journal of Accounting Research, 51(4), 779817.

Nakashima, M., & Ziebart, D. A. (2015). Did Japanese-SOX have an impact on earnings management and earnings quality? Managerial Auditing Journal, 30(4/5), 482510. doi: 10.1108/MAJ-06-2013-0890.

Romanus, R. N., Maher, J. J., & Fleming, D. M. (2008). Auditor industry specialization, auditor changes, and accounting restatements. Accounting Horizons, 22(4), 389413.

Rosenthal, S. A., & Pittinsky, T. L. (2006). Narcissistic leadership. The Leadership Quarterly, 17(6), 617633.

Salehi, M., Tarighi, H., & Shahri, T. A. (2020). The effect of auditor characteristics on tax avoidance of Iranian companies. Journal of Asian Business and Economic Studies, 27(2), 119134.

Salehi, M., Zimon, G., & Seifzadeh, M. (2022a). The effect of management characteristics on audit report readability. Economies, 10(1), 12. doi: 10.3390/economies10010012.

Salehi, M., Rouhi, S., Usefi Moghadam, M., & Faramarzi, F. (2022b). Managers’ and auditors’ narcissism on the management team’s stability and relative corporate performance. International Journal of Productivity and Performance Management, 71(4), 14901514.

Setayesh, M., Kazemnejad, M., & Zolfaghari, M. (2012). Investigating the effects of disclosure quality on stock liquidity and cost of capital of the companies listed in tehran stock Exchange. Financial Accounting Research, 3(3), 5574, (In Persian).

Simunic, D. A. (1984). Auditing, consulting, and auditor independence. Journal of Accounting Research, 22(2), 679702.

Smith, J. E., & Smith, N. P. (1971). Readability: A measure of the performance of the communication function of financial reporting. The Accounting Review, 46(3), 552561.

Stanley, J. D., & DeZoort, F. T. (2007). Audit firm tenure and financial restatements: An analysis of industry specialization and fee effects. Journal of Accounting and Public Policy, 26(2), 131159.

Suttipun, M. (2022). External auditor and KAMs reporting in alternative capital market of Thailand. Meditari Accountancy Research, 30(1), 7493.

Tajfel, H., & Turner, J. (1979). An integrative theory of intergroup conflict. In W. G. Austin, & S. Worchel (Eds), The social psychology of intergroup relations (pp. 3347). Monterey, CA: Brooks/Cole, Google Scholar.

Tamborski, M., Brown, R. P., & Chowning, K. (2012). Self-serving bias or simply serving the self? Evidence for a dimensional approach to narcissism. Personality and Individual Differences, 52(8), 942946.

Tarighi, H., Salehi, M., Moradi, M., & Zimon, G. (2022). Social capital, intellectual capital, and audit fee: Conflicting evidence from Iran. Economies, 10(2), 39. doi: 10.3390/economies10020039.

Velte, P. (2018). Does gender diversity in the audit committee influence key audit matters’ readability in the audit report? UK evidence. Corporate Social Responsibility and Environmental Management, 25(5), 748755.

Velte, P. (2020). Associations between the financial and industry expertise of audit committee members and key audit matters within related audit reports. Journal of Applied Accounting Research, 21(1), 185200.

Xu, H., Dao, M., Wu, J., & Sun, H. (2022). Political corruption and annual report readability: Evidence from the United States. Accounting and Business Research, 52(2), 166200.

Xu, Q., Fernando, G., Tam, K., & Zhang, W. (2020). Financial report readability and audit fees: A simultaneous equation approach. Managerial Auditing Journal, 35(3), 345372.

Ye, K., Cheng, Y., & Gao, J. (2014). How individual auditor characteristics impact the likelihood of audit failure: Evidence from China. Advances in Accounting, 30(2), 394401.

You, H., & Zhang, X. J. (2009). Financial reporting complexity and investor underreaction to 10-K information. Review of Accounting Studies, 14(4), 559586.

Zalata, A. M., & Roberts, C. (2017). Managing earnings using classification shifting: UK evidence. Journal of International Accounting, Auditing and Taxation, 29, 5265.

Acknowledgements

The authors are grateful to Professor Soud Almahamid (Editor-in-chief) and the two anonymous reviewers for their helpful comments and feedback.

Corresponding author

Tamanna Dalwai can be contacted at: tamanna@muscatcollege.edu.om

Related articles