Nonfinancial Information and Audit Efforts: Evidence from Management Discussion and Analysis (MD&A) Quality

Purpose: The purpose of this study is to investigate whether the Management Discussion and Analysis (MD&A) has an impact on auditors' audit efforts. MD&A is a means of disclosure that provides information about a company from the management's perspective in financial reporting. The MD&A is a standardized format of nonfinancial information that can be useful for the stake-holders. The auditors have incentives to utilize the nonfinancial information contained in the MD&A for their decision-making. We posit that the MD&A disclosure quality is associated with the level of audit efforts.Methods: We hand-collect the disclosure data from the Financial Supervisory Service of Korea (the Korean SEC).Results: By employing two measures of audit efforts, we document evidence that the quality of MD&A is associated with both audit hours and audit fees.Conclusion: It implies that the auditors perform intensive audit work for companies with high-quality disclosure of MD&A. The study contributes to the literature by providing the first approach to examine the association between the MD&A disclosure and audit efforts.