Real Effects of Reporting Key Audit Matters on Auditors' Judgment of Accounting Estimates

Abstract

This experimental study analyses whether reporting an accounting estimate as a key audit matter (KAM) can influence auditors' judgment about the reported estimate under the varying condition of implicit or no client pressure. Using the theory of moral licensing, motivated reasoning and accountability, we find that auditors' professional judgment about the reasonableness of a biased accounting estimate is not affected by the KAM reporting requirement and client pressure. Professional action in the form of the likelihood and amount of proposed adjustments is significantly lower when the accounting estimate will be reported as a KAM. Instead of enhancing professional skepticism, our results provide preliminary evidence that the format of reporting KAM can serve as moral license to waive an adjustment. Overall, our study contributes to the current debate about the audit reporting model showing that reporting KAM might have diametrical 'real effects' on auditors' judgment.