Consequences of the Adoption of the Expanded Auditor’s Report: Evidence from Hong Kong
University of Miami Business School Research Paper No. 3392449
74 Pages Posted: 31 May 2019 Last revised: 15 Jun 2022
Date Written: June 1, 2022
Abstract
We examine the adoption of the IAASB expanded audit report standards in Hong Kong and Mainland China in December 2016 and 2017, respectively. These jurisdictions combined represent one of the largest economies that has mandated expanded reports in a staggered fashion. This setting offers rich data that can help us to overcome some shortcomings of earlier studies, which document inconclusive and limited causal inferences about the consequences of expanded reports. We do not find compelling evidence that expanded reports, and specifically Key Audit Maters (KAMs), have provided incremental information to investors or improved audit quality. Next, several cross-sectional tests based on variations in companies’ information environment and KAMs’ characteristics confirm the conclusions of our main analyses. Our evidence supports some stakeholders’ concerns that expanded reports provide little company-specific or value-relevant information. Auditors still have an unrealized potential to provide useful information in expanded reports.
Keywords: Key audit matters, market reaction, audit quality, Hong Kong; Mainland China
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