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
Date Written: June 27, 2022
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: Suggested Citation