The Disclosure and Consequences of U.S. Critical Audit Matters

The Accounting Review, Forthcoming. https://doi.org/10.2308/TAR-2021-0013

83 Pages Posted: 8 Jul 2020 Last revised: 29 Jun 2022

See all articles by Jenna Burke

Jenna Burke

University of Colorado at Denver

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Summer (Xia) Xiao

Northeastern University - Accounting Group

Date Written: June 27, 2022

Abstract

This study uses difference-in-difference analyses to examine the consequences of adopting the U.S. critical audit matter (CAM) disclosure requirement for preparers and users of financial reports. The CAM requirement is one of the largest expansions of the U.S. audit report since the 1940s. We document significant changes to financial statement footnotes referenced by CAMs, which suggests an indirect consequence where management disclosure changes in areas that are expected to be scrutinized following auditor-provided disclosure. Results also suggest that, on average, CAM disclosures do not provide incremental information to the market. To further examine market reaction, we develop well-specified prediction models for the expected number and subject areas of CAMs. We find limited initial evidence that the market reacts negatively when unexpected CAMs are disclosed. Overall, our findings provide insights on the new CAM standard and particularly demonstrate its relevance to management disclosure decisions and to the market.

Keywords: Critical audit matters, PCAOB, expanded audit report, determinants, XBRL, footnote disclosure, textual analysis, market reaction, unexpected disclosures, audit quality, audit fees

JEL Classification: M42, G18, G28, F0

Suggested Citation

Burke, Jenna and Hoitash, Rani and Hoitash, Udi and Xiao, Summer (Xia), The Disclosure and Consequences of U.S. Critical Audit Matters (June 27, 2022). The Accounting Review, Forthcoming. https://doi.org/10.2308/TAR-2021-0013, Available at SSRN: https://ssrn.com/abstract=3635477 or http://dx.doi.org/10.2139/ssrn.3635477

Jenna Burke (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

HOME PAGE: http://www.xbrlresearch.com

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

Summer (Xia) Xiao

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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