Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investors’ Decision to Invest?

37 Pages Posted: 1 Sep 2013 Last revised: 31 Jul 2014

See all articles by Brant E. Christensen

Brant E. Christensen

University of Oklahoma

Steven M. Glover

Brigham Young University

Christopher J. Wolfe

Texas A&M University - Department of Accounting

Date Written: February 12, 2014

Abstract

Both U.S. and international standard setters have recently proposed changes to the standard audit report, including a requirement to include a critical audit matter (CAM) paragraph. We examine how nonprofessional investors react to an audit report’s CAM paragraph that is centered on the audit of fair value estimates. We perform an experiment with nonprofessional investors who are business school graduates who invest in individual stocks and analyze company financial data. We find that investors who receive a CAM paragraph are more likely to change their investment decision than are investors who receive a standard audit report (an information effect) or investors who receive the same CAM paragraph information in management’s footnotes (a source credibility effect). We also find that the effect of a CAM paragraph is reversed when it is followed by a paragraph offering resolution of the critical audit matter. Our findings should be of interest to regulators and standard setters as they consider the feasibility of CAM paragraphs and whether and how to convey the resolution of critical audit matters.

Keywords: Audit report, critical audit matter, estimation uncertainty, audit assurance

Suggested Citation

Christensen, Brant E. and Glover, Steven M. and Wolfe, Christopher J., Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investors’ Decision to Invest? (February 12, 2014). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2318590 or http://dx.doi.org/10.2139/ssrn.2318590

Brant E. Christensen (Contact Author)

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Steven M. Glover

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-6080 (Phone)
801-422-0621 (Fax)

Christopher J. Wolfe

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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