The Effect of Increased Audit Disclosure on Managers' Real Operating Decisions: Evidence from Disclosing Critical Audit Matters

Bentley, Jeremiah W.; Lambert, Tamara A.; Wang, Elaine Ying

doi:10.2308/tar-2017-0486

Cited by 47 publications

(21 citation statements)

References 51 publications

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“…2.1 Key audit matters and the corporate narrative risk disclosure Previous literature provides evidence of a significant positive relationship between the KAMs and the financial reporting quality in general (Reid et al, 2019: Gutierrez et al, 2018: Bentley et al, 2021. Reid et al (2019) provide empirical evidence that the existence of the new audit report has a positive association with the financial reporting quality; the management has two motives to react to the risk disclosed by the auditors: First, the threat of being exposed by the auditors.…”

Section: Corporate Risk Disclosurementioning

confidence: 99%

Corporate risk disclosure and key audit matters: the egocentric theory

Elmarzouky

Hussainey

Abdelfattah

et al. 2022

IJAIM

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Purpose This paper aims to provide unique interdisciplinary research evidence between the risk information disclosed by auditors and the risk information disclosed by corporate managers. In particular, it investigates the association between the level of risk information disclosed by auditors (key audit matters [KAMs]) and the level of corporate narrative risk disclosure. Design/methodology/approach The study sample consists of the UK FTSE all-share non-financial firms across six financial years. The authors use a computer-aided textual analysis, and the authors use a bag of words to score the sample annual reports. Findings The results suggest that KAMs and corporate narrative risk disclosure levels vary across the industries. The authors found a significant positive association between the risk information disclosed by auditors and the risk information disclosed by corporate managers. Also, the authors found that FTSE 100 firms exhibit higher significance between the ongoing concern and the level of narrative risk disclosure. Practical implications The study approach helps assess the level of management risk reporting behaviour due to the new auditor risk reporting standards. This helps to emphasise how auditors and companies engage and communicate risk-related information to stakeholders. Standard setters should suggest a more detailed reporting framework to protect the shareholders. The unique findings are incredibly beneficial to the regulators, standard setters, investors, creditors, suppliers, customers, decision makers and academics. Originality/value This paper provides a shred of extraordinary evidence of the impact of auditor risk reporting and management risk reporting. To the best of the authors’ knowledge, no study has yet investigated the corporate narrative disclosure after the new audit standards ISA 700 and ISA 701.

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Section: Corporate Risk Disclosurementioning

confidence: 99%

Corporate risk disclosure and key audit matters: the egocentric theory

Elmarzouky

Hussainey

Abdelfattah

et al. 2022

IJAIM

View full text Add to dashboard Cite

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“…8. Accounting research regularly employs web-based organizations to recruit participants (Brown-Liburd and Zamora, 2015; Pyzoha, 2015; Lambert et al , 2018; Bentley et al , 2020; (Leiby et al , 2019 for a discussion). Research Now is an international company whose actively managed panels meet online panel best practices for data quality, including participant validation, survey fraud prevention, engagement checks of respondent attention, and sampling procedures to provide transparency.…”

Section: Notesmentioning

confidence: 99%

Client negotiation strategy spillover to integrated audit judgments

Aghazadeh

Lambert

2020

MAJ

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Purpose This study aims to explore the effect of negotiating audit differences on auditors’ internal control deficiency (ICD) severity assessments, an ensuing, non-negotiated judgment, in an integrated audit. Design/methodology/approach The experiment manipulates the client’s concession timing strategy as either immediate or gradual, holding the outcome constant. A total of 34 auditors (primarily managers) resolve an audit difference with the client. Findings The client’s concession timing strategy during the negotiation of an audit difference spills over to affect auditors’ severity assessment of a related ICD. Auditors judged the ICD severity to be higher (lower) in the immediate (gradual) condition. Client retention risk inferences mediate this effect. Research limitations/implications The effect on auditors’ ICD severity assessments may not ultimately affect the audit report. Participants did not control their negotiation strategy, allowing the client’s negotiation strategy and the outcome to be held constant; it is possible that interactive effects between the client and auditor’s strategy might affect the study’s implications. Practical implications Features of the auditor–client negotiation process may influence auditors’ downstream, post-negotiation judgments and may therefore help to explain empirical evidence and Public Company Accounting Oversight Board inspection findings that show auditors often fail to identify an internal control material weakness after identifying a financial statement misstatement. Originality/value This paper expands current negotiation research by exploring the impact of inferences made based on counterparty concession strategy for downstream, non-negotiated judgments and current integrated audit research by identifying client retention perceptions as a driving factor of lower ICD severity assessments.

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“…Our study provides insights into the effect of auditors’ personalized risk information on clients’ debt contracting. On the other hand, recent studies have investigated the consequences of the disclosure of KAMs on market reactions (Gutierrez et al , 2018; Liao et al , 2019; Lennox et al , 2021), auditors’ behaviors (Reid et al , 2019; Kachelmeier et al , 2020) and managers’ behaviors (Gold et al , 2020; Bentley et al , 2021). Our paper highlights the positive impact of the KAM disclosures on debt characteristics, a previously ignored benefit of the KAM disclosures for clients’ debt financing.…”

Section: Introductionmentioning

confidence: 99%

Key audit matters and debt contracting: evidence from China

Liu

Ning

Zhang

et al. 2022

MAJ

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Purpose In an effort to make audit reports more informative to users, the Public Company Accounting Oversight Board and the International Auditing and Assurance Standards Board adopted a standard that requires auditors to disclose key audit matters (KAMs). This paper aims to explore the impact of the risk information provided by KAMs on corporate debt contracting. Design/methodology/approach In China, the KAM standard went into effect for A + H cross-listing companies in 2017 and became mandatory for all listed companies in 2018. This study takes this as an exogenous shock to examine the impact of the KAM disclosures on debt contracting. This study also designs a path analysis to open the “black box” between the risk information in KAMs and the risk perception of creditors. Moreover, This study conducts a textual analysis on the KAMs information based on samples after the release of the KAM standard. Findings This study conducts difference-in-difference tests and find that the KAM disclosures decrease interest rates and increase the proportion of long-term debt. Path analyses reveal that the KAM disclosures lead to more favorable debt characteristics through decreasing information asymmetry. This study also finds that the more KAMs are disclosed, the more favorable debt characteristics are and that different categories of KAMs have different effects on debt contracting. Originality/value This paper highlights the benefits of KAM disclosures, which are consistent with the convergence argument of risk information disclosures. Investors’ reactions to KAMs are mixed because of the differences in how professional investors and nonprofessional investors interpret information. This study provides evidence of incrementally informative nature of KAMs from the perspective of debt holders, who are professional information users.

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The Effect of Increased Audit Disclosure on Managers' Real Operating Decisions: Evidence from Disclosing Critical Audit Matters

Cited by 47 publications

References 51 publications

Corporate risk disclosure and key audit matters: the egocentric theory

Corporate risk disclosure and key audit matters: the egocentric theory

Client negotiation strategy spillover to integrated audit judgments

Key audit matters and debt contracting: evidence from China

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