Acquired intangible assets, CAM disclosures, and audit risk

Abstract

This paper investigates the association between net values of acquired intangible asset classes, their inherent audit risk, and audit fees. First, our findings using a large and hand-collected sample show that acquired intangibles, in general and especially with definite lifetimes, remain less expensive than the alternative accounting treatment: goodwill. Second, and most important, we show that auditors’ use of intangible-related critical audit matters (CAMs) moderates this association in a difference-in-differences design. Intangible assets increase audit fees especially in high litigation industries, but intangible-related CAMs moderate the link between intangible assets and audit fees. These results are consistent with the hypotheses that public disclosure of intangible-related CAMs gives the auditor subject-specific protection against audit risks from acquired intangible assets. This, in turn, allows them to reduce audit fees. Overall, these results are important for auditors, standard setters and also inform researchers regarding the risk-reducing effects of CAM disclosures.

Keywords: Intangible assets, auditing, business combinations, critical audit matters

JEL Classification: M40, M42, M48