The impact of audit committee expertise on external auditors' disclosures of key audit matters

Abstract

This paper investigates relations between audit committee expertise, auditors' disclosures of key audit matters (KAMs) and audit committees' disclosures of significant issues (SIs) in the United Kingdom. We find that audit committee accounting and industry expertise reduces both total KAMs and KAMs that are unmatched with SI disclosures. Further, changes in audit committee accounting and industry expertise significantly affect auditors' subsequent adoptions of previous SIs as new KAMs. This subsequent adoption of unmatched SIs is negatively related to prior abnormal audit fees but is not significantly related to prior abnormal accruals, suggesting that an auditor's initial omission of a subsequently adopted SI may be a consequence of lower audit effort but is not necessarily a signal of lower audit quality. The overall results are consistent with non‐alignment of KAMs or SIs being consequences of ineffective communications and that communication or AC persuasiveness improves when AC accounting expertise increases.