PurposeThis study examines the effects of key audit matter (KAM) disclosures in auditors' reports on auditor liability in cases of fraud and error misstatements using evaluators with audit experience.Design/methodology/approachThe experiment is conducted using 174 professional auditors as participants.FindingsThe participating auditors assess higher auditor liability when misstatements are related to errors rather than when they are related to fraud. In addition, the results also demonstrate that KAM disclosures reduce auditor liability only in cases of fraud and not in cases of errors. Together, the results support the view that KAM reduces the negative affective reactions of evaluators, which in turn, reduce the assessed auditor liability.Research limitations/implicationsThis study did not analyze the setting in which auditors who act as peer evaluators had an opportunity to discuss the case among their peers, which may have affected their judgments.Practical implicationsThe results of KAM disclosures on auditor liability in cases of error and fraud misstatements inform auditors that, different from the auditors' concern that disclosing KAM may increase auditors' legal risk, it tends to decrease or at least have no impact on the liability judgment.Originality/valueThis study contributes to the accounting literature by adding findings on another aspect of KAM in different audit settings, particularly, in the Thai legal environment with different types of undetected misstatements. The current conflicting results on how KAM disclosures affect auditor liability warrant further investigation of this issue in other audit contexts in different countries.
Manuscript type: Research paper Research aims: This study examines the effects of key audit matter (KAM) disclosures in auditors' report and their impact on auditors' legal exposure in cases of fraud and error misstatements. Design/Methodology/Approach: To determine the effect of KAM on auditor liability, an experiment was employed. The participants included 133 professional auditors recruited from the Big 4 audit firms and 134 MBA students. Research findings: The KAM effect is manifested in different ways for different evaluators. Specifically, auditor participants assess higher auditor liability when the misstatement relates to error than when it is connected to fraud. KAM also appears to reduce auditor's liability in cases of fraud, but not in cases of error. In comparison, nonprofessional investor participants rated a higher auditor liability when the misstatement relates to fraud than to error. KAM also appears to have a non-significant impact on auditor liability. Taken together, the results support the view that instead of increasing legal exposure as audit practitioners fear, KAM disclosures could actually mitigate, if not maintain auditors' risk of legal exposure.
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