Recent regulatory initiatives have expanded the auditor’s report to increase its informative value and narrow the audit expectation gap. Some regulators have made disclosing materiality information in the auditor’s report mandatory. In contrast, the European Union only requires a release of materiality thresholds in the additional report to the audit committee. Against this background, this study experimentally investigates the impact of materiality disclosure on the perceptions and decisions of German supervisory board members. Survey results indicate that they correctly understand the concept of materiality. Our experiment confirms the assumption that materiality disclosure matters. Furthermore, our findings suggest that perceived audit quality and the likelihood of reappointing the incumbent auditor increase and that the need for auditor’s comments on the audit approach by the auditor at the annual balance sheet meeting decreases for lower materiality levels. The disclosure of the materiality threshold seems to signal audit quality. In contrast, the materiality benchmark does not have an effect as long as the materiality threshold is the same. Thus, the expectation that the use of an uncommon benchmark may cause cognitive dissonance is not confirmed. However, there is some evidence for an interaction between the materiality threshold and the benchmark, that is, an uncommon benchmark may result in stronger reactions to threshold variations. Supervisory board members may experience psychological discomfort when confronted with an unusual benchmark in combination with an extremely low or high threshold. These findings are mainly of interest to regulators debating mandatory materiality disclosure.
Quick et al. (Fri,) studied this question.