Informational content of key audit matters and financial analysts’ forecasts

Abstract

The aim of this article was to analyze the relationship between the informational content of the key audit matters (KAMs) reported in the Independent Audit Report (IAR) and financial analysts’ forecasts for the companies listed on the B3 S.A. - Brasil, Bolsa, Balcão (B3). The research that has investigated the relevance of KAMs has not analyzed the incremental information about the audited firm, from the independent auditor’s viewpoint, that can affect financial analysts’ forecasts. The findings of this research reveal that the KAMs reported present relevant informational content about the audited firm for financial analysts, thus improving the quality of their forecasts. In addition, it was observed in the quantile analysis that the KAMs contribute to the fine tuning of analysts’ forecasts. The debate on the auditor-analyst relationship is also widened, specifically regarding the utility of KAMs for financial analysts, in terms of them considering using this information in their projections for the analyzed companies, thus reinforcing the search for their improvement by the regulator. The analysis was conducted based on generalized least squares (GLS) and quantile regressions covering 137 non-financial companies, using data from (quarterly and annual) analysts’ forecasts available from Thomson Reuters Eikon® and financial information from Economatica®. In general, the quantity and content of the items reported as KAMs were revealed to be significant in relation to the analysts’ earnings per share forecasts and to their forecasting error, revealing a reduction in asymmetry. Thus, the higher the informational value of the KAMs, the better the quality of that information is, contributing to forming an earnings forecast consensus and minimizing the error in the financial analysts’ estimates. In addition, it was observed that the disclosure of KAMs has no immediate reflection in the earnings forecast in the quarter following their disclosure, with their informational content being diluted over the following financial period, impacting the annual earnings forecast.

Mapping the state of expanded audit reporting: a bibliometric view

“…Audit expectation gap; creditors’ benefits and perceptions; investors’ reactions and perceptions; and financial analysts’ forecasts and perceptions are variables that form the third group of EAR consequences, i.e. auditee-stakeholder relationship (Hatherly et al , 1991; Innes et al , 1997; Liu et al , 2022; Rapley et al , 2021; Gutierrez et al , 2018; Venturini et al , 2022; Hu et al , 2022). Following the agency, stakeholders and legitimacy theories, some results of these studies imply that improving the audit report transparency through EAR can reduce the expectations gap, information asymmetry and possible conflicts of interest between management and shareholders and increase the stakeholders’ trust and the company’s legitimacy (Suttipun, 2022; Fuller, 2015).…”

“…increasing the readability and quality of audit reports (Smith, 2023;Li et al, 2019) and providing relevant information for stakeholders' decision-making (Alves Júnior and Galdi, 2019;Tiron-Tudor et al, 2018;Sneller et al, 2017;Prasad and Chand, 2017;Christensen et al, 2014;Cordos and Fülöp, 2015). Other research showed the essential impact of EAR on the accuracy and dispersion of analyst forecasts (Hu et al, 2022;Venturini et al, 2022), reduced management misbehaviors (Klueber et al, 2018); improving financial quality (Reid et al, 2019). Finally, Gimbar et al (2016aGimbar et al ( , 2016b argue that EAR increases the auditor's responsibility which may lead auditors to improve the audit procedures to minimize the audit risk.…”

Influence of tax aggressivity on the forecast of financial analysts

“…This technique consists of trimming the extreme values (above or below the defined minimum and maximum percentiles), replaced by the lowest and highest values remaining in the distribution, calculated by the selected percentiles. In this study, winsorization was performed at the 1% level, in line with the survey by Venturini et al (2022). With winsorization, the mean EPS become clearer (free of outliers) and allow the results to verify whether there is any difference between analyzing EPS by the mean or by the median.…”

Accuracy of EPS Forecasts of Security Analysts: Taking PROYA as an Example

“…Brown et al and Kross et al found that the advantage of analyst forecasts is related to the length of time between the last financial report of a listed company and the current forecast of the securities analyst [2][3][4]. Venturini et al also find that from an independent audit perspective, the higher the value of information on key audit matters the more it reduces the error rate of analysts' forecasts [5].…”