Expanded audit report and the value relevance of goodwill impairment

Abstract

Purpose: this study investigates whether goodwill-related Key Audit Matter (GKAM) disclosures enhance the market’s assessment of goodwill impairment losses. It examines whether enhanced auditor communication improves the informativeness of impairment reporting in a setting where managerial discretion in goodwill valuation has long been a regulatory concern.

Design/methodology/approach: using data from UK premium-listed firms, the study applies a value-relevance framework based on Ohlson (1995) to compare the association between goodwill impairment losses and market value before and after EAR adoption. It further analyses whether the presence and extent of goodwill-related KAM disclosures strengthen this association.

Findings: the results indicate that goodwill impairments lacked value relevance before EAR adoption, as managerial opportunism led to delayed or understated impairments. Following EAR adoption, enhanced auditor disclosures reduced information asymmetry, aligning reported impairments more closely with economic realities and improving their value relevance. Entity-specific disclosures were found to be particularly effective in providing incremental information to investors compared to generic disclosures.

Practical implications: the evidence indicates that goodwill-related KAM disclosures provide decision-useful information to investors by clarifying auditor focus on complex valuation judgments. Regulators and standard setters may consider these findings when evaluating the effectiveness of expanded audit reporting in improving transparency and investor understanding.

Originality/value: this study advances theoretical understanding and practical application by addressing the persistent challenge of aligning goodwill impairments, an inherently subjective and discretion-prone accounting item, with economic realities. While prior research has broadly explored the implications of EAR, this study is among the first to isolate its effects on goodwill impairments, revealing the critical role of enhanced auditor transparency in mitigating managerial opportunism. Furthermore, by distinguishing the value of entity-specific disclosures versus generic disclosures, the findings provide new evidence that auditor transparency enhances the market’s interpretation of impairment information.

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Identifiers

ORCID for Mohamed Elmahgoub: orcid.org/0000-0001-8683-2542

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