Expanded audit report and the value relevance of goodwill impairment

Abstract

Purpose: This study examines the value relevance of goodwill impairment losses and explores the role of Expanded Auditor Reporting (EAR) in mitigating the negative effects of managerial discretion on financial reporting quality. Design/methodology/approach: Using a sample of firms before and after EAR adoption in the UK, the study analyses the relationship between goodwill impairment disclosures and market valuations. It further investigates how the specificity of auditor disclosures (entity-specific versus generic) influences the alignment between reported impairments and market reactions. 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 findings provide actionable insights for regulators, auditors, and standard-setters on how enhanced audit disclosures can improve financial reporting quality. Entity-specific disclosures should be emphasised in regulatory frameworks to maximise their value to investors. 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 actionable insights for auditors and standard-setters on how tailored communication can bridge the gap between reported impairments and market valuations.