Is Communication Between the Auditor and Audit Committee Associated With Stock Price Crash Risk?

Abstract

Despite an emphasis on the value of communication from the auditor to the audit committee in auditing standards and by regulators, it is unclear if it is effective at revealing bad news to the audit committee. Using the unique Korean setting, where communication must be disclosed, we examine if it is associated with future firm-specific stock price crash risk. We find that greater communication is significantly negatively associated with stock price crash risk and that the results are driven by written communication and communication on key audit matters or internal controls. Furthermore, the value of communication is stronger coming from Big 4 auditors and when the audit committee is independent.