The Impact of Complex Estimates of IFRS-9 on The Proportion of Key Audit Matters (KAM) Disclosures: Evidence from Jordanian Capital Market

Objective – The study aimed (1) to investigate the level and issue of key audit matters (KAMs) disclosure of listed companies in Thailand, Malaysia, and Singapore, (2) to test the different level of KAMs disclosure of listed companies between Thailand, Malaysia, and Singapore, and (3) to examine the relationship between KAMs disclosure and stock reaction. Methodology/Technique – Samples were 96 listed companies of Top-50 firms from Thailand, Malaysia, and Singapore. Content analysis by word counting and checklist was used to quantify KAMs disclosure in audit reports during 2016 to 2019, while the stock reaction was measured by the stock price of the sample’s common share. Descriptive analysis, independent sample t-test, correlation matrix, and multiple regression was used to analyze the data. Findings – As the results, the study found that the average word of KAMs the disclosure was 878.74 words with 2.38 average issues during 2016 to 2019. There was a significantly different level of KAMs disclosure of listed companies between Thailand and Malaysia, between Thailand and Singapore, and between Malaysia and Singapore. Moreover, the study found a positive significant relationship between KAMs disclosure (Word) and the stock price, while there was a negatively significant relationship between KAMs disclosure (Issue) and the stock price. Novelty – This study is the first cross-sectional study of KAMs disclosure in ASEAN region. Type of Paper: Empirical Keywords: Key Audit Matters Disclosure; Stock Reaction; Thailand; Malaysia; Singapore. Reference to this paper should be made as follows: Sawangjan, P; Suttipun, M. (2020). The relationship between key audit matters (KAMs) disclosure and stock reaction: Cross-sectional study of Thailand, Malaysia, and Singapore, J. Fin. Bank. Review, 5 (3): 70 – 77. https://doi.org/10.35609/jfbr.2020.5.3(1) JEL Classification: M40, M41, M42.

In 2015, the International Standard on Auditing has been revised by the International Auditing and Assurance Standards Board (IAASB) which aims to increase communication quality and information value on the audit reports by using key audit matters (KAM) disclosure. This is because the traditional audit reports provided information asymmetry between corporations and users of financial statement especially investors as well as poor communication quality. Therefore, to reduce information asymmetry between the corporations and investors, this study mainly aims to test whether there is any relationship between KAM disclosure and stock reaction in ASEAN countries represented by Thailand, Malaysia, and Singapore. However, the results of relationship between KAM disclosures and stock reaction from the previous related studies were mixed. For example, Fellnäs et. al. (2015) and Srijunpetch (2017) found that the new audit reports increased firm value and stock reaction. It is because the new audit reports provide quality of communication from auditor's work on the confidence of financial statement users. Moreover, it also helps to reduce the audit expectation gap. On the other hand, Altawalbeh and Alhajaya (2019) found no relationship between KAM disclosure and stock price because the auditors do not report KAM for improving communication quality, but they do because of the regulation. Keywords: Auditor Report's, Key Audit Matters Disclosure, Stock Reaction, Stock Price, Stock Volume

We aim to investigate the impact of mandatory key audit matters (KAMs) disclosure on audit report lag (ARL). Additionally, we examine the potential moderating effect of firm size on the association between KAMs and ARL. We conduct Ordinary Least Square regression analyses using a sample of 602 firm-year observations from 2018 to 2020. Our findings indicate that the disclosure of KAMs is associated with a reduction in firm ARL. Furthermore, we find that the association between KAMs and ARL is particularly pronounced in large firms, suggesting that the impact of KAMs disclosure on ARL is more significant in this context. Additionally, our research reveals that the negative association between KAMs disclosure and ARL becomes more prominent when the education level of the audit committee chair is higher. Our findings underscore the importance of transparent reporting through KAMs disclosure and the role of knowledgeable and educated individuals in audit committees in facilitating a more efficient and timely audit process. Also, our finding indicates that the beneficial effect of KAMs may be more noticeable to larger firms.

PurposeThe objective of this study is to present novel evidence regarding the impact of the Key Audit Matters (KAM) disclosure requirements of International Standard on Auditing – 701 (ISA) on the auditing profession concerning reimbursement costs in underdeveloped nations, Jordan.Design/methodology/approachA year-industry fixed-effects OLS regression model has been employed to test the developed hypotheses. The regression analysis of the period from 2005 to 2022 tests the presence of KAM disclosures in Jordanian finance business, while the regression analysis of the period from 2017 to 2022 tests the actual impact of KAM disclosure following the first implementation of ISA-701 in Jordan.FindingsThe analysis has verified that the presence and the proportions of KAM disclosures outlined in ISA-701 resulted to significant auditing compensatory expenses. The findings confirmed that KAM disclosures increase auditor workload, responsibility, complexity, and risk, consequently resulting in higher reimbursement expenses.Practical implicationsThe findings of this study have the potential to serve as a basis for the development of a novel financial regulatory legislation or a regulated framework for disclosing significant occurrences. This paper provides new empirical evidence to standard-setters and policymakers regarding the requirement of ISA-701 for external auditors to disclose KAM. This study is advantageous for stakeholders, regulatory agencies, standard-setters, and audit report readers who are interested in KAM disclosures and the implementation of ISA-701. The results could inspire the academic community to obtain fresh data from emerging markets to ascertain the impact of KAM disclosure on audit practices.Originality/valueTo the author's knowledge, this study is one of the few empirical investigations into the impact of current additional disclosure rules on the audit profession concerning reimbursement costs. It provides preliminary evidence linking ISA regulations to corporate productivity in Jordan, a developing nation. Little is known about how developing nation auditors react to KAM disclosures' role in stakeholder protection and how their expanded reporting obligations influence them. This study examines audit behaviour in a weak legal setting, unlike most prior studies, which have been done in highly regulated systems.

Purpose This study aims to investigate whether and how the disclosure of key audit matters (KAMs) or critical audit matters (CAMs) affects stock market reaction by examining the association between goodwill-related KAMs and stock price crash risk (SPCR) in the Chinese context. Design/methodology/approach The authors use ordinary least squares (OLS) regression to estimate the impact of goodwill-related to KAMs disclosure on SPCR based on a sample of 26,593 firm-year observations from Chinese A-share companies listed on the Shanghai and Shenzhen Stock Exchanges from 2016 to 2023. To check the consistency of the findings, the authors use propensity score matching (PSM), alternative measure of goodwill-related KAMs, control for the extreme impact of the COVID-19 pandemic and the two-way cluster-robust standard errors. Findings The findings of this study indicate a negative association between goodwill-related to KAMs disclosure and SPCR, suggesting that auditors’ increased disclosure of goodwill as a KAM reduces corporate opacity and constrains managerial discretion in avoiding the recognition of goodwill impairment. Such proactive disclosure enhances audit quality and the transparency of the auditor’s work, thereby improving investors’ perceptions of risk and ultimately contributing to a reduction in SPCR. Finally, the findings remain consistent across a variety of robustness checks. Practical implications This paper provides valuable insights for regulators, standard setters, investors and auditors. For example, this research provides a deeper understanding of the economic impacts of KAMs, offering valuable insights for regulators and standard setters. Originality/value To the best of the authors’ knowledge, this unique paper has built upon existing research on the specific account-related KAMs disclosure by offering new insights into the impact of goodwill-related KAM disclosures from the perspective of SPCR. Moreover, the results provide new evidence contributing to the recent inconclusive literature that investigates stock market reactions to KAMs. Finally, the findings confirm standard setters’ expectations regarding the importance of KAMs reporting in enhancing the informative value of audit reports to investors.

Purpose This study investigates whether, and how, cash dividends impact the reporting of key audit matters (KAMs) in the context of a developed economy, Australia. Design/methodology/approach The study analyzes 932 firm-year observations spanning 2017–2020 of ASX 300 listed companies by employing panel regression and interpreting the results following the information asymmetry lens of agency, signaling and communication theories. Additionally, the study conducts a series of robustness tests – alongside cross-sectional analyses, mechanism tests and addressing endogeneity concerns – to ensure the consistency and reliability of the findings. Findings This paper documents a significant, negative association between cash dividends and the number and extent of reported KAMs, which remains robust when considering alternative measures and endogeneity concerns. Cash dividends signal as a tangible indicator of financial strength, reducing information asymmetry and fostering trust, resulting in reduced KAM disclosures. Particularly in cash-rich, financially nondistressed, low-risk firms and pre-COVID-19 periods, the negative association between cash dividends and KAM disclosures is more pronounced due to lower information asymmetry in these firms/periods. We document two potential channels: analyst following and forecast accuracy, through which cash dividends may affect KAM disclosures. Practical implications The findings have significant implications for companies, auditors, investors and regulators. Originality/value This research pioneers the link between cash dividends and KAMs, enriching both the accounting and finance literature with novel perspectives.

This study examines the impact of Key Audit Matters (KAM) disclosures on investment risk in the context of Indonesia’s evolving audit transparency landscape. The research is motivated by the implementation of SA701, which requires KAM disclosures in audit reports. The purpose of this study is to investigate how different aspects of KAM disclosures influence investor perceptions of risk. Using a quantitative approach, we analyze data from more than 700,000 stock data points and 1,358 firm-year observations of companies listed on the Indonesia Stock Exchange (IDX) from 2022 to 2023. Regression analysis reveals that detailed KAM disclosures (KAM2) significantly reduce investment risk, while the number of KAM disclosed (KAM1) and monetary information (KAM3) show no significant effect. These findings highlight the importance of contextual and thorough audit disclosures in reducing information asymmetry. The study contributes to the literature by emphasizing the role of audit transparency in emerging markets and provides practical recommendations for regulators to enhance KAM reporting standards.

This paper investigates how the quality of key audit matters (KAMs) disclosures and KAMs‐related audit efforts interact to improve financial reporting quality, and how these effects vary by audit regimes, joint versus single audits and Big Four participation. Drawing on agency and signalling theories, we posit that under joint audit regimes, the quality of KAMs disclosures constrains managerial discretion more effectively when auditors allocate significant efforts to audit procedures related to KAMs, and that Big Four involvement amplifies these mechanisms. Using UK‐ and French‐listed companies from 2017 to 2021, we find that the interaction of KAMs disclosures quality and KAMs‐related audit efforts significantly enhances financial reporting quality in joint audit markets but not in single‐audit settings. This effect is further strengthened when a Big Four auditor is involved in a joint audit. These associations hold under alternative accrual specifications, real‐activities controls, COVID‐19 adjustments and auditor tenure. Our study contributes to the literature by operationalizing agency and signalling theories through the interaction of two text‐based measures, KAMs disclosure quality and KAMs‐related audit efforts, shedding light on their combined effect on financial reporting quality within joint and single audit settings. The findings also offer practical benchmarks for audit committees and regulators by identifying conditions, such as audit regimes and Big Four involvement, under which KAMs disclosures are most effective.

This study examines the usefulness of new expanded audit report key audit matters (KAM) disclosures in assessing the level of financial distress present at a firm. Using KAM disclosures from a hand-collected sample of UK Premium-listed firms for 2013 to 2018, we explore the association between firm financial distress and the number, risk level, financial statement impact, and nature of disclosed KAMs. Our study expands on recent literature examining the use of audit report disclosures on financial distress prediction models as well as literature examining the utility of expanded auditor reporting. We find the greater the number of KAMs disclosed, the higher the financial distress level of a firm. Results also show the usefulness of KAMs in assessing financial distress levels increases when considering the level and nature of KAM(s) disclosed. Specifically, certain types of entity-level and individual account-level KAMs, as well as KAMs with a primary impact on a firm’s profitability and solvency, are more likely to be disclosed when firms face higher levels of financial distress. Our findings also suggest KAMs have predictive ability in assessing subsequent period financial distress levels. In all, evidence from this study suggests expanded auditor reports can help financial statement users assess and predict one of the main risks associated with a firm - the risk of failure.

This study aims to examine the determinants of key audit matters (KAM) disclosure in Indonesia. The sample consists of 951 companies listed on the IDX during 2022-2024. Data from 1,770 audit reports were analyzed using multiple regression analysis. The results show that audit fees and corporate governance have a positive relationship with key audit matters disclosure. However, this study fails to prove the positive relation between Big 4 auditors and key audit matters disclosure, as well as between female auditors and key audit matters disclosure. Meanwhile, the audit technology is proven to have a negative relationship with key audit matters disclosure. These results imply the importance of determining appropriate audit fees and the significance of having effective corporate governance in place.

PurposeThe new audit regulation for disclosure of key audit matters (KAMs) in financial reporting has been introduced in both developed and developing countries. This study investigates the influence of three distinctive sets of variables, namely industry features, firm characteristics and auditor attributes, on the extent, pattern and level of disclosure of KAMs by companies listed in Bangladesh, an emerging economy.Design/methodology/approachThe study uses qualitative and quantitative research approaches to investigate the pattern of disclosure of KAMs and their determinants. With a sample of 447 firm-year observations from companies listed on the Dhaka Stock Exchange over 2018–2020, the study reveals industry-level, firm-level and auditor-specific characteristics that affect KAMs' communication in the new audit reporting model.FindingsThe findings suggest that significant differences exist between firms in the number and types of KAMs reported and the extent of their disclosure. The study findings also observed variations both within and across different industry sectors. Highly regulated firms disclose a greater number of KAMs, while environmentally sensitive firms are found to provide a greater detail of the issues presented as KAMs. Further, both firm size and age positively impact the number of KAMs disclosed and the extent of the disclosure provided. Big-4-affiliated auditors do not issue a significantly higher number of KAMs but deliver extensive details to their KAMs description, compared to non-Big-4 auditors. In addition, while auditors, in general, tend to issue boilerplate KAMs, Big-4 associates are found to disclose more new KAMs. However, audit fees and auditor rotation do not influence KAMs disclosure.Research limitations/implicationsThis study is based on two years of publicly available data. However, future studies could consider in-depth interviews to explore the motivation behind KAMs' disclosure in Bangladesh and other developing countries with similar cultural and contextual values.Practical implicationsThese findings have substantial policy considerations for improving firms' audit quality and, thus, their financial reporting quality, with implications for national and international standard-setters, regulators and other stakeholders.Originality/valueThis study is one of the earliest endeavours to investigate KAMs in a context of an emerging country, such as Bangladesh, which adopted KAMs' disclosure in 2018.

Are key audit matter disclosures useful in assessing the financial distress level of a client firm?

The presence of board members with good governance attributes is value-relevant since it influences investors’ investment decisions. The value relevance is expected to improve with the newly introduced extended audit report to disclose key audit matters (KAMs). KAM disclosure provides information about issues faced by external auditors in the auditing of a company’s financial statement. Since the disclosure of KAM involves discussion and negotiation between the board and external auditor, it gives an indication that board value relevance can be affected by KAM disclosure. Using 931 firm-year observations from firms listed on the Bursa Malaysia between 2016 and 2019, this study re-examined the value relevance of the board and whether such value relevance improves with the disclosure of KAMs. The findings indicated that some board attributes influenced investors’ reactions negatively. The disclosure of KAM served as both an indirect mediator and a complementary mediator to increase the board’s value relevance. Investors reacted less negatively with KAM disclosure and companies’ values improved. The findings provide an insight into the role of KAM disclosure in reducing information asymmetry and assisting investors in making investment decisions. The findings support policymakers’ decisions to mandate the implementation of ISA 701, which requires the disclosure of KAMs.

Purpose: The aim of this study was to analyse the key audit matters (KAMs) being reported in South Africa by assessing 356 Johannesburg Stock Exchange (JSE)–listed entities’ audit reports from 2017 to 2020, which entailed 1424 audit reports and 2903 KAM disclosures.Design/methodology/approach: The study assessed the impact and inter-relationship of three determinants (financial year, audit firm type and industry category) on the type of KAMs disclosed, total KAMs disclosed, the number of entity- and account-level KAMs and the readability of KAM disclosures. Qualitative content analysis was used to identify the core KAM themes and classifications.Findings/results: The findings suggest the most common KAM disclosures are related to business combinations and impairments of goodwill, followed by measurement and impairment considerations for nonfinancial assets. Key audit matters disclosed predominantly have a micro-level focus on core account-level issues. Differences in KAM disclosures between Big 4 and non-Big 4 firms are not that pronounced, which signals an increased market credibility perception for second-tier firms. The Flesch average reading score indicates that KAM disclosures are complex and difficult to read. This is concerning because the KAM disclosures are in place to facilitate greater transparency for stakeholders. However, the technical nature of financial statements may mean that only users with an understanding of accounting, finance and economics will derive value from KAM disclosures.Practical implications: This research will be relevant for standard-setters, regulators and users of audit reports interested in how ISA 701 is being implemented and the state of KAM disclosures in an emerging economy.Originality/value: Barring only some exceptions, relatively little is known about the auditors’ expanded reporting requirements in a South African context.

ABSTRACTThis exploratory study investigates the implementation of key audit matters (KAM) in audit reports under ISA701 to better understand how KAM disclosures may help narrow the audit expectations gap. The study draws on findings from semi‐structured interviews with 28 professional stakeholders from the Kingdom of Saudi Arabia (KSA). The study's aim was to explore the relationship between KAM disclosures and the audit expectations gap considering audit quality concerns. Our findings reveal that (i) financial statement users report that they better understand what the auditor does, which enhanced their confidence in the audit process; and (ii) at least some financial statement users report that KAM disclosures provide new information about companies' risks that management was not already providing. We further report that many interviewees (particularly Big Four external auditors) indicated that the KAM reforms did not enhance audit quality in KSA. Interestingly, a small number of non‐Big Four auditors believed that KAM disclosures have enhanced audit quality. The key message is that the KAM reforms did not necessarily improve audit quality but that they are perceived to have played a role in further narrowing the audit expectations gap and reducing the need for communication, thus creating market efficiencies.