It’s a Matter of Style: The Role of Audit Firms and Audit Partners in Key Audit Matter Reporting
70 Pages Posted: 7 Jul 2020 Last revised: 1 Sep 2022
Date Written: June 12, 2020
We examine the relative importance of audit firm-level versus audit partner-level styles in key audit matter (KAM) reporting. We define style as the firm’s (partner’s) unique and stable pattern for issuing textually similar KAMs across clients and reporting years. We conduct the study in the UK, which has required partner identification since 2009 and KAMs since 2013. KAM standards give partners the opportunity to describe, in their own words, the most difficult applications of their professional judgments. We find that KAM reports are ten percent more textually similar when company pairs share the same audit partner and two percent more textually similar when the pairs share the same audit firm. In addition, partners modify new clients’ KAMs to align with their personal KAM reporting style and partners are more important than firms in influencing similarity in the number, topic, length, strong and weak modal tone, and cognitive processing tone of KAMs. We show that the role of partners as the locus of KAM decisions evolved over time ̶ in the early years of KAM reporting (2013-2014), partners and audit firms had about the same influence, but audit firm influence declines and partner influence dominates as time passes. We also develop a conceptual model explaining how partners’ unique decision styles arise. Tests of the conceptual model show that partners’ observable characteristics such as gender, education, and experience do not meaningfully explain their KAM reporting styles, which implies the importance of unobservable characteristics such as knowledge, risk attitudes, and professional skepticism. Ultimately, our study demonstrates that partners make unique KAM reporting judgments, countering concerns that audit firms’ standardization will yield boilerplate KAMs, but lending credence to concerns that KAM reporting judgments may lack comparability across partners.
Keywords: Audit partner identification, critical audit matters, expanded audit reporting, key audit matters, reporting style, textual analysis
JEL Classification: M41, M42
Suggested Citation: Suggested Citation