Management’s and auditors’ disclosures of significant accounting estimates and the role of audit committees

Abstract

We examine whether introducing the ISA 701 to improve audit reports has created spillover effects on the closely related management disclosures of significant accounting policies and estimates. Based on a sample of Swedish listed firms (2013–2018), we investigate the number of items and risk-related words in management disclosures, and how they relate to auditor disclosures of key audit matters (KAMs). We observe that since the introduction of the ISA 701, managers disclose more risk-related words, but this increase is significantly higher in firms with a separate audit committee on the board. Further, we discover that a positive relationship exists between managers’ and auditors’ disclosures in terms of the number of accounting items and risk factors. This correspondence is also greater for firms with audit committees. We also provide evidence for the positive effect of audit committees’ financial expertise on management disclosures. Additional analyses further investigate the determinants of KAM disclosures, reveal that a relationship exists concerning the uncertain tone of disclosures in firms with audit committees, and address any potential endogeneity related to the selection bias of firms with audit committees using the propensity score-matching technique.