The impact of key audit matter (KAM) disclosure in audit reports on stakeholders’ reactions: a literature review
-
DOIhttp://dx.doi.org/10.21511/ppm.17(3).2019.26
-
Article InfoVolume 17 2019, Issue #3, pp. 323-341
- Cited by
- 4542 Views
-
1863 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This article presents a literature review of 49 empirical studies on key audit matter (KAM) disclosure in audit reports. The study involves a structured literature review on KAM disclosure based on the reactions of stakeholders. The limitations of former studies and useful recommendations for research are stressed. Five major streams of empirical research that analyze the impact of KAM disclosure on stakeholders’ reactions are focused: (1) shareholders (e.g. investors’ perceptions of auditors’ responsibility and litigation, value relevance and investors’ decisions); (2) debtholders (e.g. loan contracting terms); (3) external auditors (e.g. audit processes and audit fees); (4) boards of directors (e.g. earnings management); and (5) other stakeholders (e.g. informational value for suppliers and customers). The authors stress that most of the included studies use experimental or archival data and analyze the impact of KAM disclosure on investor reactions in a US-American setting. As the international standard setters assume a positive impact of KAM on stakeholder reactions, mixed empirical results are found. Although there are some indications of decreased earnings management behavior, most studies find no significant changes in auditor behavior. Furthermore, there are many insignificant results with regard to shareholders’ reaction in line with our stakeholder and behavioral agency framework. The literature review is especially useful for management decisions, because firm reputation may be positively or negatively influenced by KAM regulations.
- Keywords
-
JEL Classification (Paper profile tab)M410, M420
-
References73
-
Tables7
-
Figures2
-
- Figure 1. Structure of the expectation gap
- Figure 2. Research framework
-
- Table 1. KAM and other extended auditor reporting variables
- Table 2. Count of published papers cited
- Table 3. Overview of empirical research regarding the impact of KAM and other related information on shareholders
- Table 4. Overview of empirical research regarding the impact of KAM and other related information on debtholders
- Table 5. Overview of empirical research regarding the impact of KAM and other related information on auditors
- Table 6. Overview of empirical research regarding the impact of KAM and other related information on boards of directors
- Table 7. Overview of empirical research regarding the impact of KAM and other related information on other stakeholders
-
- Almulla, M., & Bradbury, M. E. (2018). Auditor, Client, and Investor Consequences of the Enhanced Auditor’s Report (Working Paper).
- Antle, R. (1982). The Auditor as an Economic Agent. Journal of Accounting Research, 20(2), 503-527.
- Asbahr, K., & Ruhnke, K. (2018). Real Effects of Reporting Key Audit Matters on Auditors‘ Judgment of Accounting Estimates (Working Paper).
- Backof, A. G., Bowlin, K., & Goodson, B. M. (2018). The Importance of Clarification of Auditors’ Responsibilities Under the New Audit Reporting Standards (Working Paper).
- Bédard, J., Coram, P., Esphahbodi, R., & Mock, T. J. (2016). Does Recent Academic Research Support Changes to Audit Reporting Standards? Accounting Horizons, 30, 255-275.
- Bédard, J., Gonthier-Besacier, N., & Schatt, A. (2014). Costs and Benefits of Reporting Key Audit Matters in the Audit Report: The French Experience (Working Paper).
- Bédard, J., Gonthier-Besacier, N., & Schatt, A. (2018). Consequences of Expanded Audit Reports: Evidence from the Justifications of Assessments in France (Working Paper).
- Bentley, J. W., Lambert, T. A., & Wang, E. Y. (2018). The Effect of Increased Audit Disclosure on Managerial Decision Making: Evidence from Disclosing Critical Audit Matters (Working Paper).
- Boolaky, P. K., & Quick, R. (2016). Bank Directors’ Perceptions of Expanded Auditor’s Reports. International Journal of Auditing, 20(2), 158-174.
- Brasel, K., Doxey, M., Grenier, J., & Reffett, A. (2016). Risk Disclosure Preceding Negative Outcomes. The Accounting Review, 91(5), 1345-1362.
- Brouwer, A., Eimers, P., & Langendijk, H. (2016). The relationship between key audit matters in the new auditor’s report and the risks reported in the management report and the estimates and judgments in the notes to the financial statements. Maandblad voor Accountancy en Bedrijfseconomie (MAB), 90, 580-613.
- Brown, T., Majors, T., & Peecher, M. (2016). The Impact of a Higher Intent Standard on Auditors’ Legal Exposure and the Moderating Role of Jurors’ Legal Knowledge (Working Paper).
- Cade, N., & Hodge, F. (2014). The effect of expanding the audit report on managers’ communication openness (Working Paper).
- Carver, B. T., & Trinkle, B. S. (2017). Nonprofessional Investors’ Reactions to the PCAOB’s Proposed Changes in the Standard Audit Report (Working Paper).
- Chow, C. (1982). The demand for external auditing. The Accounting Review, 57(2), 272-291.
- Christensen, B., Glover, S., Steven, M., & Wolfe, C. (2014). Do critical audit matter paragraphs in the audit report change nonprofessional investors’ decision to invest? Auditing: A Journal of Practice & Theory, 33(4), 71-93.
- Church, B. K., Davis, S. M., & McCracken, S. A. (2008). The Auditor’s Reporting Model: A Literature Overview and Research Synthesis. Accounting Horizons, 22(1), 69-90.
- DeAngelo, L. (1981). Size and Audit quality. Journal of Accounting and Economics, 3(3), 183-199.
- Dechow, P. M., Ge, W. & Schrand, C. (2010). Understanding earnings quality: A review of the proxoxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3), 344-401.
- DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2-3), 275-326.
- Dennis, S. A., Griffin, J. B., & Johnstone, K. M. (2016). The Value Relevance of Managers’ and Auditors’ Disclosures about Material Measurement Uncertainty (Working Paper).
- Doxey, M. M. (2014). The Effects of Auditor Disclosures Regarding Management Estimates on Financial Statement Users’ Perceptions and Investments (Working Paper).
- Eilifsen, A., Knechel, W., & Wallage, P. (2001). Application of the Business Risk Audit Model. A Field Study. Accounting Horizons, 15(3), 193-207.
- Elliott, W. B., Fanning, K., & Peecher, M. E. (2016). Do Investors Value Financial Reporting Quality Beyond Estimated Fundamental Value? And, Can Better Audit Reports Unlock This Value? (Working Paper).
- Ferguson, A. (2005). A Review of Australian Audit Pricing Literature. Accounting Research Journal, 18(2), 54-62.
- FRC (2013). Consultation Paper: Revision to ISA (UK and Ireland) 700. Requiring the auditor’s report to address risks of material misstatement, materiality, and a summary of the audit scope.
- Fuller, S. (2015). The Effect of Auditor Reporting Choice and Audit Committee Oversight Strength on Management Financial Disclosure Decisions (Dissertation). Georgia State University.
- Gaynor, L. M., Kelton, A. S., Mercer, M., & Yohn, T. L. (2016). Understanding the Relation between Financial Reporting Quality and Audit Quality. Auditing, 35(4), 1-22.
- Gimbar, C., Hansen, B., & Ozlanski, M. (2016). Early Evidence on the Effects of Critical Audit Matter on Auditor Liability. Current Issues in Auditing, 10(1), A24-A33.
- Gold, A., Gronewold, U., & Pott, C. (2012). The ISA 700 Auditor’s Report and the Audit Expectation Gap. Do Explanations Matter? International Journal of Auditing, 16(3), 286-307.
- Gros, M., & Worret, D. (2014). The challenge of measuring audit quality: some evidence. International Journal of Critical Accounting, 6(4), 345-374.
- Gutierrez, E., Minutti-Meza, M., Tatum, K. W., & Vulcheva, M. (2018). Consequences of adopting an expanded auditor’s report in the United Kingdom. Review of Accounting Studies, 23(4), 1543-1587.
- Haut Conseil des Commissaires aux Comptes (2006). NEP-705 Justification des appréciations. Normes d’Exercice professionnel des Commissaires aux Comptes.
- IAASB (2015). The new auditor’s report: Greater transparency into the financial statement audit. New York.
- Ittonen, K. (2012). Market reactions to qualified audit reports: Research approaches. Accounting Research Journal, 25(1), 8-24.
- Jensen, M., & Meckling, W. (1976). Theory of the firm. Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.
- Kachelmeier, S., Schmidt, J., & Valentine, K. (2017). The Disclaimer Effect of Disclosing Critical Audit Matters in the Auditor’s Report (Working Paper).
- Kahneman, D., & Tversky, A. (1979). Prospect Theory: An analysis of decision under risk. Econometrica, 47(2), 263-292.
- Kang, Y. J. (2018). Are Audit Committees More Challenging Given a Sophisticated Investor Base? Does the Answer Change Given Anticipation of Additional Mandatory Audit Report Disclosure (Working Paper).
- Kipp, P. (2017). The Effect of Expanded Audit Report Disclosures on Users’ Confidence in the Audit and the Financial Statements (Dissertation). University of South Florida.
- Klueber, J., Gold, A., & Pott, C. (2018). Do Key Audit Matters Impact Financial Reporting Behavior? (Working Paper).
- Koehler, A. G., Ratzinger-Sakel, N. V. S., & Theis, J. C. (2016). The Effects of Key Audit Matters on the Auditor’s Report’s Communicative Value (Working Paper).
- Koh, H. C., & Woo, E.-S. (1998). The expectation gap in auditing. Managerial Auditing Journal, 13(3), 147-154.
- Kraakman, R. (1986). Gatekeepers. The anatomy of a third-party enforcement strategy. Journal of Law, Economics and Organizations, 2(1), 53-104.
- Larcker, D. F., & Rusticus, T. O. (2010). On the use of instrumental variables in accounting research. Journal of Accounting and Economics, 49(3), 186-205.
- Lennox, C., Schmidt, J., & Thompson, A. (2017). Are the Expanded Model of Audit Reporting Informative to Investors? (Working Paper).
- Li, H. A., Hay, D., & Lau, D. (2018). Assessing the Impact of the New Auditor’s Report (Working Paper).
- Liggio, S. (1974). The Expectation Gap. The Accountant’s Legal Waterloo? Journal of Contemporary Business, 3, 27-44.
- Light, R., & Smith, P. (1971). Accumulating Evidence: Procedures for Resolving Contradictions among Different Research Studies. Harvard Educational Review, 41(4), 429-471.
- Mock, T. J., Bédard, J., Coram, P. J., Davis, S. M., Espahbodi, R., & Warne, R. C. (2013). The Audit Reporting Model: Current Research Synthesis and Implications. Auditing: A Journal of Practice and Theory, 32(1), 323-351.
- PCAOB (2017). The auditor’s report on an audit of financial statements when the auditor expresses an unqualified opinion and related amendments to PCAOB standards (PCAOB release No. 2017-001). New York.
- Pelzer, J. R. E. (2016). Understanding Barriers to Critical Audit Matter Effectiveness: A Qualitative and Experimental Approach (Dissertation). Floria State University.
- Pepper, A., & Gore, J. (2015). Behavioral Agency Theory New Foundations for Theorizing About Executive Compensation. Journal of Management, 41(4), 1045-1068.
- Porter, B. (1993). An Empirical Study of the Audit Expectation-Performance Gap. Accounting and Business Research, 24, 49-68.
- Porump, V.-A., Karaibrahimoglu, Y. Z., Lobo, G. J., Hooghiemstra, R., & de Waard, D. (2018). Is More Always Better? Disclosures in the Expanded Audit Report and Their Impact on Loan Contracting (Working Paper).
- Prasad, P., & Chand, P. (2017). The Changing Face of the Auditor’s Report: Implications for Suppliers and Users of Financial Statements. Australian Accounting Review, 27, 348-367.
- Rapley, E. T., Robertson, J. C., & Smith, J. L. (2018). The Effects of Disclosing Critical Audit Matters and Auditor Tenure on Investors’ Judgments (Working Paper).
- Ratzinger-Sakel, N. V. S., & Theis, J. (2017). Does considering key audit matters affect auditor judgment performance? (Working Paper).
- Reid, L. C., Carcello, J. V., Li, C., & Neal, T. L. (2015). Are Auditor and Audit Committee Report Changes Useful to Investors? Evidence from the United Kingdom (Working Paper).
- Reid, L. C., Carcello, J. V., Li, C., & Neal, T. L. (2018). Impact of Auditor Report Changes on Financial Reporting Quality and Audit Costs: Evidence from the United Kingdom (Working Paper).
- Ross, S. (1973). The Economic Theory of Agency: The Principal’s Problem. American Economic Review, 63, 134-139.
- Simnett, R., & Huggins, A. (2014). Enhancing the Auditor’s Report: To What Extent is There Support for the IAASB’s Proposed Changes? Accounting Horizons, 28(4), 719-747.
- Simnett, R., & Trotman, K. T. (2018). Twenty-five Year Overview of Experimental Auditing Research: Trends and Links to Audit Quality. Behavioral Research in Accounting (online first).
- Sirois, L., Bédard, J., & Bera, P. (2018). The Informational Value of Key Audit Matters in the Auditor’s Report: Evidence from an Eye-tracking Study. Accounting Horizons, 32(2), 141-162.
- Smith, K. W. (2017). Tell Me More: A Content Analysis of Expanded Auditor Reporting in the United Kingdom (Working Paper).
- Sneller, L., Bode, R., & Klerx, A. (2017). Do IT matters matter? IT-related key audit matters in Dutch annual reports. International Journal of Disclosure and Governance, 14(2), 139-151.
- Tiron-Tudor, A., Cordos, G. S., & Fulöp, M. T. (2018). Stakeholders’ perception about strengthening the audit report. African Journal of Accounting, Auditing and Finance, 6(1), 43-69.
- Trpeska, M., Atanasovski, A., & Bozinovska, Z. (2017). The relevance of financial information and contents of the new audit report for lending decisions of commercial banks. Accounting and Management Information Systems, 16(4), 455-471.
- Velte, P. (2018). Does gender diversity in the audit committee influence key audit matters’ readability in the audit report? UK evidence. Corporate Social Responsibility and Environmental Management, 25(5), 748-755.
- Vinson, J. M., Robertson, J. C., & Cockrell, R. C. (2018). The Effects of Critical Audit Matter Removal and Duration on Jurors’s Assessment of Auditor Negligence (Working Paper).
- Watts, R., & Zimmerman, J. (1983). Agency Problems, Auditing, and the Theory of the Firm: Some Evidence. Journal of Law & Economics, 26, 613-633.
- Wiseman, R. M., & Gomez-Mejia, L. R. (1998). A Behavioral Agency Model of Managerial Risk Taking. Academy of Management Review, 23(1), 133-153.
- Wright, A. M., & Wright, S. (2014). Modification of the Audit Report: Mitigating Investor Attribution by Disclosing the Auditor’s Judgment Process. Behavioral Research in Accounting, 26, 35-50.