Disclosure Of Key Audit Matters Research Articles

The Implementation of the KAM Reforms in Saudi Arabia: Stakeholder Perspectives on the Audit Expectations Gap

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.

Are material ESG issues making their way into key audit matters? An analysis of Colombian innovative companies

This study examines whether auditors are innovating in their audit reports by incorporating material environmental, social, and governance (ESG) issues from companies' sustainability reports into the Key Audit Matters (KAMs) section. Additionally, it assesses whether ESG performance influences this inclusion. Content analysis was conducted on the materiality matrices of sustainability reports and KAMs disclosures for 20 Colombian companies listed on the COLCAP index during the period 2019–2021. Using logistic regression analysis, we examined relationships between ESG scores and KAMs disclosure of material ESG issues. The results obtained show that auditors strongly emphasise governance but tend to overlook social and environmental issues within their KAMs. Furthermore, higher governance scores increase the likelihood of ESG consideration in the KAMs, while lower profitability and leverage also lead to greater ESG inclusion in the KAMs. This pioneering study offers an initial analysis of whether material ESG issues arising from sustainability reports also appear in KAMs disclosures, thus addressing a significant literature gap. The study findings suggest that auditors need appropriate guidance and enhanced competencies to perform holistic ESG risk evaluation, as the acceptance of integrated sustainability reporting is gaining momentum globally.

Research on the Impact of Disclosure of Key Audit Matters on Corporate Financing Constraints

This paper studies the impact of key audit disclosures on corporate financing constraints through empirical analysis. Although the disclosure of key audit matters can help to reduce the information differences between management and investors and improve the audit quality, such disclosure may also be regarded as a risk signal, and the warning function to investors may cause the difficulty of corporate financing to increase. This study concludes that the increase in the number of key audit disclosures will make corporate financing more difficult. When an enterprise announces more key audit matters, the market may regard them as a stronger risk signal, causing investors to be more cautious in making investment decisions, thus increasing the financing difficulty of the enterprise. However, in companies with large board sizes, the disclosure of key audit matters can alleviate the financing constraints. Larger boards are more likely to make the right decisions and therefore may disclose fewer risky aspects of key audit matters. This study provides a new understanding of key audit issues in financing activities and a useful reference for the possible impact of macro-policy adjustments on corporate profitability. In addition, the research also provides useful information support for enterprises to understand and adapt to the new auditing standards.

Cultural dynamics and tenure trajectories: how auditor tenure and culture influence key audit matters in the GCC

PurposeThis study examines the impact of audit partner tenure on Key Audit Matters (KAM) disclosures within Gulf Cooperation Council (GCC) countries. It explores how Hofstede’s cultural dimensions influence this relationship, elucidating the effect of cultural context on auditing practices.Design/methodology/approachUtilizing a sample of 456 non-financial firms in the GCC from 2016 to 2021, the study employs regression analyses to explore audit partner tenure's influence on KAM disclosures and the moderating effects of Hofstede's dimensions of power distance, individualism, masculinity and uncertainty avoidance. This affords a detailed examination of individual and cultural impacts on audit quality.FindingsResults reveal a positive relationship between audit partner tenure and KAM disclosures, suggesting that firm-specific knowledge and industry expertise acquired over a long tenure may enhance auditors' ability to identify and report significant matters. Power distance and uncertainty avoidance amplify this effect, whereas individualism diminishes it. Masculinity does not yield significant results.Research limitations/implicationsThis study underscores the need for auditing standards to reflect the complex interplay of auditor tenure and cultural dynamics in the profession's global landscape.Originality/valueThis research contributes to the literature on audit quality by highlighting the formative role of individual auditors and cultural characteristics in KAM disclosure practices. It is among the first to quantitatively analyse the intersection of audit partner tenure and culture in the GCC. It provides valuable insights for regulators, practitioners and policymakers seeking to enhance audit practices across diverse cultural environments.

Mandatory disclosure of key audit matters and the choice of earnings management

Mandatory disclosure of key audit matters and the choice of earnings management

Analysis of Key Audit Matters Disclosures in Financial Reporting: The First Evidence from Indonesia

The aim of this study is to explore the first year of Key Audit Matters (KAMs) disclosure in Indonesia, which has been fully adopted since 2022. The research reports on matters published in 806 statutory audit reports of listed companies in 2022. This study provides the first description of KAMs disclosure by Indonesian public companies. The findings suggest that the most common KAM disclosures are related to "allowance for doubtful debt," "revenue (excluding fraud)," "valuation of inventories," "fixed assets (including depreciation)," and "property valuation." The study found differences between Big-4 auditors and non-Big-4 auditors concerning the average number of KAMs disclosed

Key audit matter disclosure and stock mispricing: Evidence from China

Stock mispricing refers to the situation where the stock price of a firm diverges from its intrinsic value, which can impair market resource allocation efficiency and hinder the healthy development of the capital market. This study aims to investigate the influence of key audit matters (KAM) disclosure on stock mispricing. Using a firm-level panel dataset from 2017 to 2022, we demonstrate that KAM disclosure can significantly reduce stock mispricing. This effect is achieved by mitigating information inefficiency and discouraging market speculation. Heterogeneity analysis reveals a more pronounced impact in firms with poor audit quality and deficient internal control systems.

Evaluasi Peran Otoritas Jasa Keuangan dalam Pengawasan Implementasi Standar Audit 701 (2021)

The objectives of this study are to provide an overview of the benefits of communicating key audit matters (KAM) for OJK's oversight function, to identify findings related to KAM in United Kingdom and Malaysia, and how those regulators have responded to those findings, and to evaluate OJK's response related to KAM. This research is carried out by in-depth interviews with supervisors and analysts from the Directorate of Regulation and Development of the OJK Capital Market Sector. KAM communication provided benefits in OJK's supervisory function, among others, in determining the items to be reviewed in the Issuer's financial statements and in reviewing the audit responses stated in the auditor's report have been supported by the auditor's working papers. In carrying out their oversight function, the United Kingdom and Malaysia found, among others, that the average number of KAM and words in communicating KAM in the auditor's report continued to decline, the content of KAM of companies audited by Big 4 audit firms had more words for the same number of KAM, and the benefits of communicating KAM decreased because KAM disclosures were boilerplate. OJK's response in relation to the implementation of SA 701 (2021) is to draft OJK regulations related to KAM and to prepare a study related to the first-year implementation of SA 701 (2021). Based on these responses, it is reflected that OJK has an important role in the implementation support stage to ensure that the policy implementation runs well in the long term.

Do key audit matters matter? Correspondence between auditor and management disclosures and the role of audit committees

This study examines whether there is a correspondence between auditor disclosures of key audit matters (KAMs) and management disclosures of significant accounting policies and estimates, following the introduction of the International Standard on Auditing (ISA) 701. In addition, we investigate how audit committees moderate the relationship. We employ a sample of Swedish listed firms (2016–2018), using measures that capture the extent and quality of management disclosures and how they relate to auditor KAM disclosures, including the number of accounting items disclosed, total number of words, and number of unique KAM-related words (via a “bag-of-word” technique). We find a positive correspondence between auditor and management disclosures, and the correlation is greater in firms with an audit committee. Additional analyses provide evidence that management disclosure quality increases after the introduction of ISA 701, but the positive effect is mostly found in firms with a separate audit committee on the board. The results are robust to alternative measures for disclosures and using a matched sample design. Our findings suggest that policymakers should consider the interplay between audit standards and audit committees.

Key audit matters disclosures and informed traders

We examine whether the audit regulation of disclosing key audit matters (KAM) provides value-relevant information to short sellers as informed investors. The theoretical underpinning for examining short sellers' ability and incentives to use KAM disclosures in their stock valuation implications is based on a prediction theory and a skilled information processing theory of short sellers. Using a sample of expanded auditor's reports from UK-listed firms during the 2010–2017 period and hand-collecting a dataset of KAM disclosures, we find no evidence that the short interest is different for the period before than after the U.K.'s expanded auditor's report regulation. However, in our cross-sectional tests, we find that KAM disclosures have a marginal effect on short interest and a positive association between short interest and unexpected and severe KAM disclosures. We conclude that, except for severe KAM that is value-relevant to sophisticated investors, the disclosures in the expanded auditor's report have no valuation implications for short sellers. Our results are robust in examining the reactions of the financial market and analysts to KAM disclosures and addressing potential endogeneity concerns.

Corporate carbon emissions management and the disclosure of key audit matters

The principle that sustainable development can foster high-quality corporate growth has gained popularity as a tool for environmental protection. Utilizing data of firms listed on Shanghai Stock Exchange and Shenzhen Stock Exchange from 2010 to 2020, this study investigates the impact of corporate carbon emissions management (CCEM) on the disclosure of key audit matters (KAMs). The findings indicate that CCEM can significantly elevate the adequacy of disclosure concerning KAMs. Tests on underlying mechanism underscore that accounting conservatism and audit quality serve as pivotal channels through which CCEM facilitates the disclosure of KAMs. Further analysis on economic consequences reveals that the disclosure of KAMs helps mitigate stock price crash risk while enhancing environmental, social, and governance performance. This study enriches research on factors influencing the disclosure of KAMs, concurrently providing valuable insights for advancing high-quality corporate development and facilitating communication between auditors and users of audit reports.

Two-tier board characteristics and expanded audit reporting: Evidence from China

This paper investigates the relationship between the characteristics of the two-tier board structure (board of directors and supervisory board) and the disclosure of key audit matters (KAMs) in the expanded audit report. Using a sample of 10,857 firm-year observations of Chinese listed firms spanning the 2017–2020 period, we offer two main results. First, with regard to the board of directors, we find that the auditor discloses a greater number and lengthier content of KAMs when there is a CEO duality and the board meetings are more frequent. Second, conversely, we find that the size and independence of the supervisory board are related to a lower number and length of KAMs disclosure. When we distinguish between account-level KAMs and entity-level KAMs, our further analysis shows that our results are principally associated with account-level KAMs rather than entity-level KAMs. Specifically, we find that CEO duality and the frequency of board of directors meetings are positively related to account-level KAMs. We also find that the size and independence of the supervisory board are negatively related to account-level KAMs. Our further analysis also shows evidence that these two-tier board structure characteristics are associated with the tone of KAMs disclosure in a consistent fashion. Our findings are robust and address endogeneity problems. Overall, our results suggest that the characteristics of the two-tier board structure drive KAMs disclosure, which should be of interest to regulatory bodies, policymakers, auditors, multinational firms, and users of financial reports.

The effect of gender diversity on the disclosure of key audit matters: examination of dual-signature environment

PurposeThis paper aims to investigate the impact of gender diversity in the composition of engagement auditors on the disclosure of key audit matters (KAMs) in a dual-signature environment.Design/methodology/approachThe authors used the unique institutional setup of Taiwan, where the law requires that audit reports be signed by two audit partners. The authors examined the effect of gender diversity composition among engagement auditors on KAM disclosure, considering behavioral differences between female and male auditors.FindingsThe empirical results indicate that gender diversity composition in the dual-signature environment is associated with the number of disclosed KAM items (KAMIT) and the length of the explanations for each KAMIT. Furthermore, the authors found that gender diversity composition, particularly when led by female audit partners, has a more pronounced impact on the explanation of each KAMIT rather than on the disclosure of KAMIT. The authors also noted that the moderating effect of audit firm specialization does not influence the gender diversity composition of audit partners in disclosing KAMs.Originality/valueThis study’s empirical findings demonstrate that the interaction between different gender compositions in a dual-signature environment influences KAM disclosure.

The Impact of Risk Disclosure Overlaps on Auditor Liability: Evidence from China

ABSTRACT Audit disclosure requirements have increased across countries in recent years. In this study, we explore a disclosure pattern that has been adopted by approximately 23 percent of Chinese publicly listed companies and their auditors—the disclosure of up to three overlapping items both in the risk factor section of financial reports and in the key audit matters (KAM) section of the audit report. We predict and find that such disclosure overlaps increase auditor liability, using audit fees as a proxy for auditor liability, and that (1) both the magnitude and explicitness of overlapped disclosure are positively associated with auditor liability and (2) analyst following, Top 10 auditors, and auditor tenure play a moderating role in the association between overlapped disclosures and auditors’ perceived liability. Collectively, our analysis supports our hypothesis that KAM disclosure increases auditor liability when coupled with management disclosure of related risk factors. Data Availability: Data are available from the sources cited in the text. JEL Classifications: M41; M42; K41.

Audit committee-auditor interlocking and disclosure of key audit matters

ABSTRACT The key audit matters in audit report can improve the communication effect and narrow the information gap. The interlock relationship between audit committee and auditor based on cooperation and trust will affect the whole process of communication between auditor and management, and thus affect the disclosure of key audit matters. This article examines the impact of audit committee-auditor interlocking relationship on disclosure of key audit matters. The findings suggest that audit committee-auditor interlocking can improve the adequacy of key audit matters.The conclusion is still robust after controlling the selectivity bias caused by observable factors.

Does expanded disclosure in the audit report involve unintended consequences? Evidence from tax avoidance

PurposeThis study aims to examine how new regulation changes for the auditor’s report, so-called key audit matters (KAMs), influence tax avoidance.Design/methodology/approachThis study uses data from firms listed on the Omani capital market over the period 2012–2019 and analyzes these data using pooled panel data regression with a robust standard error. It uses two common proxies for tax avoidance and two measures for the KAMs disclosure requirement.FindingsThis study finds a sharp decrease in the effective tax rate following the introduction of KAMs disclosure and the issuance of more KAMs in audit reports. This result is supported by several robustness checks. In an additional analysis, the authors observe interesting results, indicating that real earnings management mediates this association, while the audit committee plays a moderating role. The authors do not find a moderating effect of Big4 on this association, but find discrepancies within the Big4 firms in relation to this moderating effect.Originality/valueThe results of this study indicate that although the introduction of the KAMs disclosure requirement may have positive consequences, it may also lead to unintended negative consequences. This conclusion has not been comprehensively reported in literature.

The determinants of linguistic features in key audit matters: Empirical evidence from Europe

This study investigates the determinants and dynamics of the linguistic features of key audit matters (KAMs) in European countries. Using natural language processing algorithms, including FINBERT, I quantify stylistic and content‐based text characteristics at the KAM level and find that KAM length, readability, sentiment, quantitative density, specificity, the degree of forward‐looking statements, and the extent of boilerplate language are associated with the type of KAM topics, client attributes, and audit firm characteristics. In additional analyses, I also find early empirical evidence of a time trend in these linguistic features. Since their introduction in 2016, KAMs are becoming longer, more quantitative, more specific, but also include more boilerplate phrases. Collectively, the results of the study contribute to a more nuanced understanding of the determinants and dynamics of KAM disclosures.

The effect of key audit matters and management disclosures on auditors’ judgements and decisions: An exploratory study

We investigate how disclosure of key audit matters (KAMs) and related management footnote disclosures on a subjective accounting estimate relating to fair value in the financial statement footnotes affect auditors' perceptions of their accountability and their subsequent adjustment decisions. In relation to accountability, a substitution effect is found between KAMs disclosures and footnotes. That is, auditors believe that they are less accountable either when they can report on the fair value estimates in KAMs disclosures, or when management has provided expanded fair value related footnotes. However, we find that when the fair value disclosure is considered by both KAMs and expanded footnotes it results in the auditor recommending a more conservative fair value adjustment decision. Overall, our results show that the requirement to disclose KAMs does make a real difference and interacts with management's disclosures to affect auditors' perceptions of accountability and their adjustment decisions.

The effect of expanded audit report on IPO underpricing: Evidence from China

This study investigates the impact of the expanded audit report on IPO underpricing. Using the sample of A-share listed firms in China from June 2014 to November 2021, we find that the expanded audit reports can reduce the speculative behavior of investors in the initial phase of IPOs, resulting in lower IPO underpricing and consecutive rising limits. The channel tests suggest that the disclosure of key audit matters reduces value uncertainty and alleviates investors' local bias. Our results are consistent to a series of robustness tests. Further analyses show that the negative relation between expanded audit reports and IPO underpricing intensifies when the legal environment is weak and firms' information transparency is low. Additional tests uncover positive market reaction after the mandatory disclosure rule in the long run. Overall, our study adds new insights to the information effects of the expanded audit reports in emerging markets.

Measuring and analyzing the information entropy value of key Audit matters (KAMs) disclosure at the system and reporting scale

Drawing upon information entropy theory, this study deduces a measurement formula for the information entropy for key audit matters (KAMs) disclosure, considering both system scale and audit report scale. The information entropy of an audit report within a specific system is calculated as the weighted average logarithm value of the continuous product of KAM disclosure frequencies. Subsequently, a systematic calculation of KAM disclosure information entropy is conducted using 14,837 financial statement audit reports from listed companies traded on the Shanghai and Shenzhen Stock Exchanges, covering the FY 2017-20 period. The findings indicate that: (1) The information entropy of KAM disclosure has decreased from 2017 to 2020, while the homogenization degree of KAM disclosure has increased. (2) The information entropy and evenness of KAM disclosure on the main board are significantly higher than those of the ChiNext and the STAR Market. (3) The transportation, storage and postal services, manufacturing, finance, power supply, heating, gas and water supply industries exhibit the highest overall information entropy of KAM disclosure, indicating good quality. (4) The information entropy and evenness of KAM disclosure are higher for the big 4 accounting firms compared to domestic accounting firms and big 8 accounting firms. (5) The KAMs disclosed when the Certified Public Accountant (CPA) provides unqualified opinions, emphasizing that matter paragraphs possess higher information value, and are more disorderly and balanced. The measurement method and related results of information entropy offer reference and comparative value for future research on the quality of KAMs disclosure.