The Effect of Key Audit Matters and Uncertainty Disclosures on Auditors’ Accountability Perceptions and Fair Value Decisions

Abstract

We investigate how the mandated disclosure of Key Audit Matters (KAMs) and management disclosures in the financial statement footnotes affect auditors’ perceptions of their accountability and their subsequent fair value decisions. We find a substitution effect between KAMs disclosures and footnotes, in that auditors believe they are less accountable either when they have the opportunity to report on the fair value estimates in KAMs disclosures or when management has provided fair value related footnotes. However, despite the lower perceived accountability from either of these disclosures, we find that when both KAMs and footnotes are reported concurrently, auditors require greater fair value adjustments. Overall, our results show that the requirement to disclose KAMs does make a difference on auditors’ perceptions of accountability and their adjustment decisions.