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We investigate the impact of considering key audit matters (KAM) on auditor judgment performance and conducted a 2×2 between-subjects experiment based on a goodwill impairment testing case with 73 experienced auditors. We manipulated the two independent variables KAM consideration (present vs. absent) and client pressure (high vs. low). As dependent variables, we captured skeptical judgment and action as different facets of auditor judgment performance. Our results suggest that auditors' reaction to our client pressure manipulation is rather weak. If at all, auditors seem to become slightly more skeptical in their judgments and actions when client pressure is high, which might suggest that a reasonableness constraint has been triggered. Furthermore, we find that auditors exhibit significantly less skeptical judgment when KAM consideration is present than when KAM consideration is absent. This suggests that, when considering KAM, auditors are more willing to acquiesce to their clients' desired accounting treatments due to moral licensing. JEL Classification: M42

We investigate the effect of key audit matters (KAM) in the auditor's report as required by the new ISA 701. We consider investment professionals and nonprofessional investors in our experiments, in which we test the communicative value of a KAM section relating to goodwill impairment. Our main results show that in the condition in which the KAM section suggests that already small changes in the key assumptions could eventually lead to a goodwill impairment (KAM negative condition), investment professionals assess the economic situation of the company to be significantly better as compared to the condition in which the KAM section suggests that only large changes in the key assumptions could eventually lead to a goodwill impairment (KAM positive condition). In the additional analysis with non-professional investors, we find that a KAM section has no communicative value, implying that nonprofessional investors have difficulties with processing the information conveyed with KAM.

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Recent accounting research indicates that capital markets price firms' greenhouse gas (GHG) emissions and that disclosed emissions levels are negatively associated with firms' market values. The departure point for this study is to investigate whether investors value firms differently based on the strategies firms use to mitigate GHG emissions. These strategies include making operational changes, which reduces emissions attributable to the firm, and purchasing offsets, which reduces emissions unattributable to the firm. Using an experiment, we hold constant a firm's financial performance, investment in emissions mitigation, and net emissions, and find evidence that nonprofessional investors perceive the firm to be more valuable when it primarily uses an operational change strategy versus an offsets strategy. However, consistent with theory, this result only occurs when the firm's prior sustainability performance is below the industry average and not when it is above the industry average. This difference in firm value is consistent with the notion that nonprofessional investors believe information about a firm's emissions management strategy is material. Supplemental exploratory analyses reveal that our results are mediated by investors' perception that an operational change strategy is more socially and environmentally responsible than an offsets strategy for below industry average firms. Implications for our findings on theory and practice are discussed.

Capital constraints require companies to prioritize among the host of sustainability issues to which they can allocate capital. In this study, we investigate the role of three important factors that can affect this prioritization process: key decision-makers, sustainability reporting models, and stakeholder communications. We investigate these factors through the lenses of economic theory (i.e., the shareholder value approach), stakeholder theory, and enlightened stakeholder theory by collecting survey evidence from 104 managers in the resource transformation sector who are involved in or familiar with their company's prioritization process. This study contributes to the literature by providing important insights into companies' internal decision-making processes regarding sustainability issue prioritization.

This study examines the impact of considering key audit matters (KAM) on auditor judgment performance. This study uses a 2×2 between-subjects experiment based on a goodwill impairment testing case with 73 auditors. The two independent variables KAM consideration (present vs. absent) and client pressure (high vs. low) are manipulated. As dependent variables, skeptical judgment and action as different facets of auditor judgment performance are used. The results suggest that auditors exhibit significantly less skeptical judgment when KAM consideration is present than when KAM consideration is absent. This implies that, when considering KAM, auditors are more willing to acquiesce to their clients’ desired accounting treatments due to moral licensing. By showing that KAM consideration leads to less skeptical judgment, it can be documented that the new KAM reporting requirement, intended to improve the communicative value of the auditor’s report for users (IAASB, 2012), comes at the expense of auditor judgment performance. As in every experiment, the risk that the results are case-specific has to be acknowledged.

The effectiveness and efficiency of the corporate governance structure depends on different governance bodies within the organization. As crucial parts of good corporate governance they provide constituting, monitoring and controlling tasks concerning the risk management and internal control system. These corporate governance mechanisms include the internal control function (IAF) and the audit committee (AC). Based on a dataset of 550 responses from U.S. internal auditors, our study explores empirically the IAF’s contribution to good corporate governance. Our results suggest that the IAF constitutes a central element of the governance structure. Furthermore, an intensive interaction between the IAF and the AC is positively linked with the efficiency and effectiveness of the governance processes, internal controls and risk management.