Financial Reporting Complexity and Its Influence on Audit Effort

Abstract

This paper introduces a novel, multi-dimensional framework for conceptualizing and measuring
financial reporting complexity (FRC) and investigates its non-linear influence on audit effort.
Moving beyond traditional proxies such as firm size or industry, we define FRC as an emergent
property arising from the interaction of structural, informational, and relational dimensions
within a firm’s reporting ecosystem. The structural dimension captures the intricacy of organizational hierarchies and transaction networks; the informational dimension addresses the
volume, heterogeneity, and interconnectedness of accounting data; and the relational dimension
considers the strategic interactions and information asymmetry between management, auditors, and regulators. We propose that the relationship between FRC and audit effort is not
monotonic but follows an inverted U-shape, moderated by the deployment of advanced audit
technologies. At low to moderate levels of complexity, increased FRC demands greater auditor
labor and scrutiny. However, beyond a critical threshold, excessive complexity triggers a technological adaptation response, where auditors increasingly rely on and invest in sophisticated
data analytics, process mining, and AI-assisted continuous auditing tools, which can paradoxically streamline certain audit procedures while intensifying others related to model validation
and interpretability. To test this hypothesis, we develop a composite FRC index using a combination of disclosed financial note metrics, textual analysis of annual reports, and network
analysis of related-party disclosures. Empirical analysis, utilizing a hand-collected dataset from
a diverse sample of publicly traded firms, supports the curvilinear relationship and identifies the
moderating role of audit firm technology investment. Our findings challenge linear cost models
in audit pricing and provide a nuanced understanding of how modern audit practices evolve
in response to the growing intricacy of financial information environments. This research contributes to auditing literature by offering a more granular, systems-theoretic view of complexity
and its implications for audit labor economics and technological adoption.