48 Pages Posted: 17 Aug 2014 Last revised: 31 Jan 2017
Date Written: January 23, 2017
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: 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