“Tone at the top”: management’s discussion and analysis and audit quality

Purpose - This paper aims to investigate whether the managers’ emphasis on audit in the management’s discussion and analysis (MD&A) section of the 10-K filing, as part of the firm’s “tone at the top,” is linked to audit quality. Design/methodology/approach - Adopting a computational linguistics approach, the authors measure the manager’s audit emphasis as the frequency of audit-related words in the MD&A. The authors then assess the relationship between audit emphasis and audit quality with ordinary least squares and probit regression models. Findings - This study finds that the manager’s audit emphasis, proxied by the count of audit-related words, is positively associated with audit fees, audit delay, the appointment and retention of Big 4 and industry-specialist auditors, and the probability of switching to Big 4 auditors, while negatively linked to abnormal accruals and the possibility of financial misstatements. Research limitations/implications - The audit emphasis measure suffers from limitations. The computer program determining audit emphasis may misinterpret words in the MD&A. Researchers need to consider procedures to minimize misinterpretations. Practical implications - Frequency of audit words in the MD&A reflects the firm’s aspiration for audit quality. Auditors, regulators and investors could ascertain such aspiration from past and current MD&As. Originality/value - This study associates the manager’s emphasis on audit, measured with computational linguistics from the MD&A, with realized audit quality.