The Disclaimer Effect of Disclosing Critical Audit Matters in the Auditorrs Report

Abstract

Will disclosing critical audit matters (CAMs) in the auditor’s report, as the U.S. Public Company Accounting Oversight Board (PCAOB) has proposed, affect user confidence in CAM-related financial statement areas and assessments of auditor responsibility for misstatements? Results from an experiment with attorneys, financial analysts, and MBA students indicate that all groups have less confidence in a financial statement area disclosed as a CAM than in an area not disclosed as a CAM. Although manifest in different ways across groups, results also indicate that disclosing a financial statement area as a CAM helps protect auditors from legal exposure if a misstatement is subsequently discovered in that area. Our study contributes beyond the conclusions reached to date by related studies by providing evidence of a “disclaimer effect” for PCAOB-based CAM disclosures as measured by both confidence and responsibility assessments across multiple constituent groups and CAM settings.