A New Uncertainty Measure - CAM

Posted: 10 Aug 2020

See all articles by Julia Klevak

Julia Klevak

Prudential Financial - Quantitative Management Associates

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Duo Pei

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Kate Suslava

Bucknell University Freeman College of Management

Date Written: July 23, 2020

Abstract

In contrast to past auditor opinions, which were largely unqualified and uniformly written, a new disclosure requirement expands auditors’ opinions to include a description of Critical Audit Matters (“CAMs”) and the audit steps necessary to form an opinion about them. The expanded disclosure provides substantially more information about the areas of financial reporting that auditors consider most uncertain. Using a comprehensive sample of initial CAM disclosures in the 10-K filings for the period of August 2019-May 2020, we find that a larger number of CAMs, a greater number of required auditing procedures and more wordy and extensive CAM discussions are negatively associated with stock returns immediately around the 10-K filings. We also document significantly more negative analyst earnings revisions for firms whose auditors report more CAMs and provide more verbose CAM disclosures.

Keywords: critical audit matters, stock returns, textual analysis

JEL Classification: G12, G14, M41

Suggested Citation

Klevak, Julia and Livnat, Joshua and Pei, Duo and Suslava, Kate, A New Uncertainty Measure - CAM (July 23, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3659633 or http://dx.doi.org/10.2139/ssrn.3659633

Julia Klevak

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Duo Pei

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

Kate Suslava (Contact Author)

Bucknell University Freeman College of Management ( email )

701 Moore Ave
Lewisburg, PA 18837
United States

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