Critical Audit Matters: Possible Market Misinterpretation
Auditing: A Journal of Practice and Theory, forthcoming
Posted: 10 Sep 2020 Last revised: 20 Dec 2022
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: Suggested Citation