When Financial Reporting Readability Matters for Audit Effort: The Role of Conditional Conservatism

This study examines whether conditional conservatism attenuates the additional audit effort associated with low financial reporting readability. Using 11,167 firm-year observations for 859 US non-financial firms listed on the New York Stock Exchange from 2010 to 2022, we estimate panel regressions with year and industry fixed effects. Readability is measured with five linguistic indices, audit effort is proxied by audit fees and audit delay, and conditional conservatism is captured through a firm-year asymmetric timeliness measure. Higher readability is associated with lower audit fees and shorter audit delays. More importantly, the positive interaction between readability and conditional conservatism indicates that these negative associations weaken as conditional conservatism increases. Drawing on agency and signalling theories, we interpret conservatism as an accounting-based mechanism that constrains optimistic reporting and enhances perceived reporting credibility. The study connects textual disclosure quality with accounting recognition practices and shows that auditors’ responses to narrative complexity depend partly on the properties of the underlying accounting numbers.