The role of extended audit reports in enhancing goodwill impairment recognition: evidence from UK firms

Abstract

Purpose: the purpose of this study is to examine the impact of the extended audit report (EAR) on the recognition and timeliness of goodwill impairment in the UK. Specifically, this study explores whether EAR adoption enhances financial reporting quality by improving the alignment between impairment recognition and firms’ underlying performance, especially when goodwill impairment is identified as a key audit matter (KAM).

Design/methodology/approach: drawing on agency and accountability theories, this study analyses 1,451 firm-year observations from 347 non-financial UK companies listed on the FTSE All Shares index over a three-year period around EAR adoption. Tobit, Logit, Balanced Matching and OLS regression techniques are used to test the hypotheses, with fixed effects and extensive robustness checks addressing concerns related to endogeneity, measurement validity and model specification.

Findings: the findings of this study show that EAR adoption significantly improves the timeliness of goodwill impairment recognition by strengthening the association between poor firm performance and reported impairments. This relationship is further amplified when goodwill impairment is flagged as a KAM, particularly in cases where auditors perceive it as a high-risk issue. In contrast, the volume of disclosure does not appear to enhance recognition, suggesting that disclosure quality and perceived risk matter more than disclosure length.

Practical implications: the results of this study underscore the role of EAR as an accountability mechanism that enhances auditor scrutiny and constrains managerial discretion in high-risk, judgment-intensive areas. Regulators and standard setters may consider encouraging more targeted, risk-based disclosures to strengthen audit effectiveness. Companies and auditors should also recognise the behavioural impact of KAM disclosures on managerial reporting incentives.

Originality/value: this study contributes new archival evidence on how EARs influence auditor and managerial behaviour in the context of goodwill impairment. By integrating agency and accountability theories and focusing on a complex reporting area, this study refines understanding of how expanded audit disclosures improve financial reporting outcomes and mitigate agency conflicts.

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