Audit committee characteristics and Key Audit Matters (KAMs) disclosures

Abstract

AbstractIn this study we have examined if audit committee characteristics in terms of audit committee members’ gender, audit committee members’ accounting and finance backgrounds, audit committee members’ industry expertise and audit committee members’ legal expertise affect the number and content characteristics of KAMs reported. We examine the issue based on a sample of 1112 firm‐year‐observations and 3013 KAMs spanning for the period 2017–2020. We use multivariate regression models to examine the research questions. We also use a variety of other specifications for robustness test. Our findings suggest that female audit committee members reduce the number and lengths of KAMs. Our results further suggest that auditors disclose more specific information, identify more firm specific KAMs and produce more readable KAMs in the presence of female members in the audit committee. We find similar results for audit committee members’ accounting and finance backgrounds and audit committee members’ industry expertise. However, audit committee members’ legal expertise reduces disclosure specificity, readability, and lengths of KAMs. Our results suggest that the audit committee strength/diversity affects the number and content characteristics of KAMs disclosure. This study makes a unique contribution by showing that audit committee characteristics affect the content specificity and idiosyncrasy of KAMs disclosed by external auditors. Moreover, this study supports the previous findings in the UK context that audit committee characteristics affect the number and readability of KAMs. Given the global adoption of ISA 701, evidence from current study will add to the global effort to understand the determinants of KAMs reporting practices. For regulators this study contributes by showing that audit committee members’ diversity affects the content characters of KAM.