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The Disclaimer Effect of Disclosing Critical Audit Matters in the Auditor’s Report

48 Pages Posted: 17 Aug 2014 Last revised: 31 Jan 2017

Steven J. Kachelmeier

University of Texas at Austin - Department of Accounting

Jaime J. Schmidt

University of Texas at Austin

Kristen Valentine

University of Texas at Austin, McCombs School of Business, Department of Accounting

Date Written: January 23, 2017

Abstract

We broaden recent efforts to examine the effects of critical-audit matter (CAM) disclosures in the auditor’s report on auditor legal exposure. In contrast to related research in which participants proxy for jurors in a trial setting, we elicit the perceptions of practicing attorneys, financial analysts, and MBA students to examine the settlement-based and reputational damages that auditors face when a misstatement arises. We find general support for the conclusion that CAM disclosures decrease assessments of auditor responsibility when the misstatement is in the same area as the CAM. This “disclaimer effect,” however, is manifest in different ways for different groups. Specifically, MBA students and financial analysts exhibit the greatest difference when the CAM and misstatement occur in different areas, while attorneys exhibit the greatest difference relative to the traditional reporting model that does not mention CAMs. Together, our results support the view that, instead of increasing legal exposure as audit practitioners have feared, CAM disclosures could actually mitigate auditor legal exposure.

Keywords: PCAOB, audit reporting, critical audit matters, piecemeal assurance, auditor litigation

JEL Classification: M40, M41, K20, K22, K41

Suggested Citation

Kachelmeier, Steven J. and Schmidt, Jaime J. and Valentine, Kristen, The Disclaimer Effect of Disclosing Critical Audit Matters in the Auditor’s Report (January 23, 2017). Available at SSRN: https://ssrn.com/abstract=2481284

Steven J. Kachelmeier

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-3517 (Phone)
512-471-3904 (Fax)

Jaime J. Schmidt (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

Kristen Valentine

University of Texas at Austin, McCombs School of Business, Department of Accounting ( email )

2110 Speedway Stop B6400
Austin, TX 78712
United States

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