Effects of disclosures on corrected misstatements and internal control weaknesses on investors’ judgements and decisions.

Abstract

We conducted an experiment to investigate whether ratings of four aspects of a company (the evaluation of quality of management, financial statements, the audit and likelihood of investment), considered by investors in making investment decisions, are contingent on two types of disclosures; firstly, the presence of disclosures on corrected misstatements and secondly, the presence of disclosures on internal control weaknesses.

Results indicate that the joint effects from manipulation of the presence and/or form of both types of disclosures causes variances in investors’ evaluation of the quality of management and financial statement, but no direct variation was observed for evaluation of audit and likelihood of investment. However, to the extent that a correlation was established between both evaluation of quality of management and financial statement reliability and likelihood of investment, we inferred that likelihood of investment was contingent on the presence and/or form of corrected misstatement disclosure and presence of internal control weaknesses disclosure through evaluation of quality of management and financial statement reliability as intervening variables. These findings are in support of the view that such disclosures in the audit report do provide investors with useful information for decision-making, particularly if the corrected misstatement disclosed was, in fact, an overstatement. Thus, it demonstrates the untapped potential of the audit report as an instrument to enhance the quality of information provided to users.