Impact of Corporate Risk Factor Disclosures on Auditor Judgements and Client Reporting: A Textual Analysis From 10‐K Filings

ABSTRACT Using textual analysis of clients' qualitative corporate risk factor disclosures (RFDs) from firms' 10‐K filings, we investigate how RFDs influence auditors' assessments of client business risk (CBR), as reflected in their pricing and reporting behaviour. We find that auditors charge clients who disclose more extensive RFDs approximately 5%–7% higher audit fees compared to their counterparts. We also find negative associations between discretionary accruals, meet/beat analysts' forecasts and RFDs, indicating that companies with more extensive risk disclosures potentially exhibit more conservative accounting practices. Auditors are more likely to issue going concern opinions for financially distressed clients that disclose more RFDs. The observed relationships hold when RFDs are analysed at both the auditor portfolio and auditor–industry levels. Our study contributes to the ongoing debate on the implications of the SEC's mandated RFDs by providing evidence of their influence on audit pricing and firms' financial reporting behaviour.