Auditor Benchmarking of Client Disclosures

We examine auditors’ disclosure benchmarking, which we define as auditors’ acquisition of non-client financial statement information for the purpose of evaluating a client’s financial statement information. Employing a novel dataset that captures auditors’ access of non-client annual and quarterly SEC filings on EDGAR, we predict and find that auditors engage in disclosure benchmarking when auditing clients faced with higher levels of reporting complexity, financial reporting risk, and litigation risk. Lastly, we predict that auditors incorporate the information they obtain via disclosure benchmarking into their audit. Consistent with our prediction, disclosure benchmarking is positively associated with a client’s financial statement disaggregation, and client footnotes exhibit greater comparability to targeted non-clients’ footnotes after disclosure benchmarking. Overall, this study offers an empirical look into the “black box” of the audit process by examining auditor benchmarking and its effects on client financial reports.