The Determinants, Textual Properties, and Consequences of U.S. Critical Audit Matter Disclosures

73 Pages Posted: 8 Jul 2020 Last revised: 8 Jan 2021

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

Xia Xiao

Northeastern University - Accounting Group

Date Written: January 7, 2021

Abstract

This study investigates the determinants, textual properties, and consequences of the newly disclosed U.S. critical audit matters (CAMs). We find that complexity, financial reporting issues, and the magnitude of accounts that require high degrees of judgment significantly determine the quantity and subject of CAM disclosures. Next, we use difference-in-difference designs to examine whether adopting the CAM disclosure requirement is associated with changes to management’s disclosures, market reaction, and audit outcomes. Using textual analysis, we document significant changes in financial statement footnotes referenced by CAMs, suggesting that management, alone or in conjunction with their auditor, change their disclosure in an apparent attempt to expand and clarify areas that may be scrutinized. Results reveal no overall market reaction or change in audit fees or quality. However, in cross-sectional analysis within CAM adopters, we find that variation in the number and textual properties of CAMs disclosed are significantly associated with abnormal returns and audit fees, suggesting they convey audit-specific risk information. In additional analysis, we utilize our well-specified determinants models to explore further outcomes of the unexpected non-disclosure of CAMs. Overall, our findings provide insights on the new CAM standard, and particularly demonstrate their 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, audit quality, audit fees

JEL Classification: M42, G18, G28, F0

Suggested Citation

Burke, Jenna and Hoitash, Rani and Hoitash, Udi and Xiao, Xia, The Determinants, Textual Properties, and Consequences of U.S. Critical Audit Matter Disclosures (January 7, 2021). 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)

Xia Xiao

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
358
Abstract Views
1,293
rank
96,055
PlumX Metrics