Critical Audit Matters: Possible Market Misinterpretation

Auditing: A Journal of Practice and Theory, forthcoming

Posted: 10 Sep 2020 Last revised: 20 Dec 2022

See all articles by Julia Klevak

Julia Klevak

Wellington Management Company

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Duo Selina Pei

University of Warwick - Warwick Business School

Kate Suslava

Bucknell University Freeman College of Management

Date Written: September 2, 2020

Abstract

The Public Company Accounting Oversight Board recently expanded audit reports to disclose Critical Audit Matters (CAMs) and the audit procedures used to address them. We study the first wave of CAM disclosers from July 2019 through May 2020, which included large accelerated filers reporting on their 2019 fiscal year results. We examine whether market participants erroneously perceive firms with more extensive CAM disclosures to be riskier than firms with less extensive CAM disclosures. Consistent with possible market misinterpretation, we find that firms with more extensive CAM disclosures are associated with increased perceived uncertainty: stock prices of these firms are significantly more volatile and analyst forecasts are significantly more dispersed than those of firms with less extensive CAM disclosures.

Keywords: auditor reports, textual analysis, critical audit matters, abnormal returns

JEL Classification: G12, G14, M41

Suggested Citation

Klevak, Julia and Livnat, Joshua and Pei, Duo and Suslava, Kate, Critical Audit Matters: Possible Market Misinterpretation (September 2, 2020). Auditing: A Journal of Practice and Theory, forthcoming, Available at SSRN: https://ssrn.com/abstract=3685369 or http://dx.doi.org/10.2139/ssrn.3685369

Julia Klevak

Wellington Management Company ( email )

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

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Kate Suslava (Contact Author)

Bucknell University Freeman College of Management ( email )

701 Moore Ave
Lewisburg, PA 18837
United States

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