Do Key Audit Matters Impact Financial Reporting Behavior?

35 Pages Posted: 30 Jul 2018

See all articles by Johanna Klueber

Johanna Klueber

TU Dortmund University

Anna Gold

Vrije Universiteit Amsterdam; Norwegian School of Economics (NHH)

Christiane Pott

TU Dortmund University

Date Written: June 27, 2018

Abstract

Our paper examines whether the implementation of KAM in auditors’ reports affects managers’ reporting behavior. In line with prior research in psychology, we argue that greater transparency through KAM sections lead to higher accountability pressure as managers may expect their judgments to be scrutinized more strongly in the presence of KAM and hence, to an improvement of financial reporting quality. Further, we examine whether informational precision (firm-specific versus non-firm-specific information) in KAM sections moderates the effect of KAM presence on reporting behavior. Our results show that participants' tendency to manage earnings decreases with increased information precision. Thus, we find that participants who received an auditor report with a KAM section including firm-specific content are less likely to engage in earnings management activities than participants who received a traditional auditor report. However, we obtain inconclusive results regarding the auditor report including KAM sections with low informational precision. Thus, our results suggest that KAM serve as a beneficial mechanism for enhancing managerial financial reporting quality, but only when information precision in KAM sections is high.

Keywords: Key Audit Matters (KAM), Audit Regulation, Financial Reporting Behavior, Accountability Theory

JEL Classification: C91, M42, D81

Suggested Citation

Klueber, Johanna and Gold, Anna and Pott, Christiane, Do Key Audit Matters Impact Financial Reporting Behavior? (June 27, 2018). Available at SSRN: https://ssrn.com/abstract=3210475 or http://dx.doi.org/10.2139/ssrn.3210475

Johanna Klueber (Contact Author)

TU Dortmund University ( email )

Friedrich-Wöhler-Weg 6
Dortmund, 44227
Germany

Anna Gold

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 598 25 92 (Phone)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Christiane Pott

TU Dortmund University ( email )

Friedrich-Wöhler-Weg 6
Dortmund, 44227
Germany

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