Convergence in audit materiality: The impact of public disclosure on auditors’ behavior and quality

Abstract

We explore the public disclosure of materiality to understand whether it influences decisions regarding materiality thresholds. Disclosure of audit materiality may facilitate the assessment of auditors’ assurance, thereby narrowing the expectation gap. However, disclosure may also induce industry-convergence towards average materiality thresholds; or be exploited by low-quality auditors to justify higher materiality. Using a large sample of UK firms, following the materiality disclosure requirements introduced by ISA 700, we predict and find evidence that disclosure triggers industry-convergence in materiality thresholds. This convergence is not accompanied by changes to audit fees, but we document audit quality effects. Industry-converging materiality changes are negatively associated with restatements when the firm decreases materiality to converge towards the average. In contrast, materiality convergence appears to worsen audit quality when auditors initial positioning is below industry benchmarks and need to increase materiality to meet industry’s thresholds.