Do Critical Audit Matter Disclosures Protect Auditors By Forewarning Users of Misstatement Risk?
39 Pages Posted: 17 Aug 2014 Last revised: 6 May 2018
Date Written: April 28, 2018
Using a comprehensive participant pool that includes MBA students, financial analysts, and practicing attorneys, we investigate whether critical audit matter (CAM) disclosures protect auditors by forewarning users of misstatement risk. Overall, we find that CAM disclosures lower user confidence in CAM-related financial statement areas prior to any knowledge of a misstatement and lower assessments of auditor responsibility for misstatements subsequently revealed in CAM-related areas. Among MBA students and financial analysts, we observe the greatest difference when comparing a CAM to a non-CAM financial statement area when a CAM disclosure is present, whereas among attorneys, the biggest difference arises when comparing a CAM to the traditional reporting model with no CAM disclosure. On balance, our results support the view that, instead of increasing legal exposure as some have feared, CAM disclosures could mitigate the auditor’s legal exposure.
Keywords: PCAOB, audit reporting, critical audit matters, piecemeal assurance, auditor litigation
JEL Classification: M40, M41, K20, K22, K41
Suggested Citation: Suggested Citation