Grammatical Errors, Financial Reporting Quality, and Audit Engagement Risk

SUMMARY We examine whether grammatical errors (GEs) in financial reports provide a timely signal of the reliability of firms’ financial information. Consistent with the notion that GEs capture the time, effort, and resources devoted to financial filings, we find that GEs are more common when firms have less time to prepare their financial reports and, importantly, that they are positively associated with the likelihood of a future restatement and the discovery of an internal control weakness. We also document a positive association between GEs and auditor effort. Collectively, our findings suggest that GEs provide a credible signal of financial reporting quality and audit engagement risk. JEL Classifications: M40; M41; M42.