The impact of key audit matter (KAM) disclosure in audit reports on stakeholders’ reactions: a literature review

  • Received April 22, 2019;
    Accepted July 30, 2019;
    Published September 4, 2019
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/ppm.17(3).2019.26
  • Article Info
    Volume 17 2019, Issue #3, pp. 323-341
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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.

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    • 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