DescriptionTextual analysis is the process of extracting useful information from unstructured text data. In the domain of accounting, auditing, and finance, textual analysis is still an emerging area (Loughran and McDonald 2016). Motivated by the potential benefits of applying textual analysis to auditing, this dissertation consists of three essays on using textual analysis to improve the understanding of annual report review process, audit fee decision, and internal control risks.
The first essay uses text mining to uncover the intensity of SEC comment letters and its association with the probability of restatement of 10-K filings. Specifically, it utilizes the Loughran and McDonald strong and weak modal word lists (Loughran and McDonald 2011) and measure the intensity of initial SEC comment letters based on the use of strong/weak modal language. The paper finds a positive association between the intensity of comment letter and the probability of restatement of the reviewed 10-K filing.
The second essay examines whether the qualitative disclosures of earnings press releases provides additional information about audit risks that relates to audit fee decision. We find that a more abnormally negative tone of earnings in press releases is associated with higher audit fees, showing that the abnormal tone of press releases can be a signal of the client’s business risk. We also find the abnormal tone as a proxy
of opportunistic disclosure behaviors when the abnormal tone is extremely positive. In addition, the association between an abnormally negative tone and audit fees is moderated by the credibility of the disclosure and by auditor’s experience with the client.
The third essay investigates whether the risk factor disclosures on internal control over financial reporting (ICFR-related risk factors) complement the mandatory SOX 404 disclosures of material weaknesses in internal control. We find that the ICFR-related risk factor disclosure incrementally predicts future related adverse consequences. The results also suggest that firms with ICFR-related risk factors are likely to have higher audit fees. In addition, the contents of ICFR-related risk factors can help financial statement users assess the severity of internal control issues. These findings suggest that ICFR-related risk factors reflect potential internal control deficiencies.