Unusual tone of managers and audit engagement: Emphasis on audit opinion and auditor size

The objective of the present study is to examine the impact of abnormal managerial tone on audit fees and audit delay, considering modified audit opinions and the size of the audit firm. Data from 154 companies over the years 2014 to 2023 were evaluated using regression analysis, considering fixed effects for year and industry. The findings indicate that abnormal tone has a positive impact on audit fees and audit delay. Additionally, the prior year's audit opinion strengthens the effect of abnormal tone on audit fees but does not significantly influence the relationship between abnormal tone and audit delay. The size of the audit firm does not significantly affect the relationship between abnormal tone and audit fees but does strengthen the impact of abnormal tone on audit delay. Abnormal managerial tone increases the likelihood of modified audit opinions, thereby influencing auditors' perception of the client company's operational risk, and audit costs increase with higher risk. Consequently, audit fees and delays increase. Additionally, larger audit firms, with their enhanced reputation, exert greater effort to ensure audit quality. Therefore, prior modified audit opinions and the size of the audit firm can moderate the relationship between abnormal tone and audit fees and delays. The present study demonstrates that non-quantitative signals such as biased tone can also increase audit costs and audit completion time. The findings support contract cost theory and audit risk theory. Furthermore, it expands the literature on financial reporting quality and auditors' responses, showing how auditors utilize their tools (e.g., audit opinions) to manage risks arising from managerial behavior. It also contributes to understanding the differences in audit quality between large and small audit firms.The research findings assist auditors in designing risk assessment procedures that account for managerial tone, warn managers about the negative consequences of biased reporting, and guide regulators in incorporating qualitative aspects of reporting into regulatory frameworks. Finally, the study provides a framework for future research to examine the impact of qualitative variables, such as tone, on audit decisions and proposes new metrics for assessing financial reporting risk.