Do Auditors Perceive Management Strategic Disclosure Behaviors? Evidence from Audit Risk and Voluntary Disclosure Tone

This study investigates whether auditors strategically perceive the tone of management qualitative earnings press releases and incorporate that information when determining audit fees. Using publicly issued management qualitative earnings press releases, we quantify abnormal tones that cannot be explained by concurrent, relevant financial indicators, and examine associations between abnormal tone and audit fees. Unexpectedly, we find that the abnormal tone of press releases is negatively associated with audit fees. We further find that the negative abnormal tone of earnings press releases is negatively associated with audit fees, whereas a positive abnormal tone is not associated with audit fees except in extreme cases. This shows that auditors selectively consider the tone of press releases to measure a client's business risk, but they use it to measure management opportunistic disclosure behaviors only if the tone is extremely positive. In addition, auditors assign a lower weight to an abnormal tone in less credible earnings press releases, such as those from a client who issued earnings press releases with a highly abnormal positive tone in the previous year, even if current abnormal tone is not positive. These findings generally support the idea that auditors strategically perceive and use the tone of management forecasts when they evaluate audit risks