Do Critical Audit Matter Disclosures Impact Investor Behavior? PDF Download

Author: Qian Huang
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
The Public Company Accounting Oversight Board (PCAOB) has recently required auditors to disclose critical audit matters (CAMs), which are financial statement matters that involve especially challenging, subjective, or complex auditor judgments. The PCAOB contends that CAMs will increase the decision usefulness of the auditor's report and indirectly benefit investors by increasing audit and financial reporting quality. I examine whether investors react to CAM disclosures and whether they perceive any change in adopting firms' financial reporting quality. Using a difference-in-differences design, I find that (1) while there is no significant stock price reaction to CAMs on average, investors react negatively to CAMs disclosed by firms with high levels of short interest; (2) there is a significant increase in the quarterly earnings response coefficient for adopting firms. The effect is driven by big-N audit firms, and increases with the number of CAMs reported. Collectively, the evidence suggests that investors use CAMs to confirm their pre-existing opinions about a firm, and that they perceive an improvement in audit quality and financial reporting reliability due to the CAM disclosure requirement.

Author: Marianne Ojo D Delaney PhD
Publisher:
ISBN:
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Languages : en
Pages :

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Book Description
“A critical audit matter is defined as a matter that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment.”In view of subjectivity and judgment based elements involved in the determination of critical audit matters, as well as the move to a principles based framework - critical audit matters determined using such a framework, this presentation aims to highlight why a combination of bright line rules and high level principles should be applied to the more innovative phases involving critical decision making - the application of this combination of rules not only reflecting the level of flexibility offered by such a combination, but also the priority accorded to such management decisions which may also embody tactical and strategic elements.

Author: Kurt Oestriecher
Publisher: John Wiley & Sons
ISBN: 1119784611
Category : Business & Economics
Languages : en
Pages : 304

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Book Description
Keep abreast of the fast-paced changes in accounting and auditing with relevant pronouncements, exposure drafts, and other guidance recently issued in the accounting, auditing, compilation, preparation, and review arenas. This book will help accountants and financial managers sort through the most recent accounting and auditing complexities so they can identify and apply recently issued FASB, PCAOB, and AICPA standards and guidance. New topics covered include: Revenue recognition Leases Financial instruments Intangible assets Consolidation Business combinations Recently issued SAS No. 134–140 Auditing interpretations Recently proposed SSAE standards Overview of SSARS guidance

Author: Rebecca Files
Publisher:
ISBN:
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Languages : en
Pages :

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Book Description
As of June 30, 2019, the Public Company Accounting Oversight Board (PCAOB) requires that the new auditor's report for large accelerated filers include a discussion of Critical Audit Matters (CAMs). The communication of CAMs is intended to increase the relevance of the auditor's report for investors by disclosing accounts that require especially challenging, subjective, or complex auditor judgment. This study examines investor response to CAM disclosures for the first large accelerated filers in the United States. We find no statistically significant price or volume response around the CAM release dates in 2019. In additional tests, we explore and find variation in the semantic similarity between the CAMs disclosed in the auditor's report and the risk factors disclosed by the firm in the same 10-K; however, we continue to find no statistically significant price or volume response for the CAMs containing more novel information compared to the firm's own risk disclosures. Next, we consider the possibility that the information communicated in CAMs is disclosed by the firm in the prior year's risk factor disclosure or financial statement footnotes. To test this, we analyze the semantic similarity between CAMs disclosed in 2019 and the risk factors and footnotes disclosed by the firm in both 2018 and 2017. We find relatively high similarly in disclosure content across years, verifying that many of the firms in our sample appear to have disclosed the same information that is communicated in CAMs in the prior year(s). However, even for those firms with very dissimilar disclosures, we continue to find an insignificant price and volume response in 2019. Overall, our results suggest that CAM disclosures for large accelerated filers do not communicate incremental information to investors. The information content of CAMs for smaller firms (e.g., non-accelerated filers) remains to be seen.

Author: Anamol Khadka
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Book Description
Critical Audit Matters includes any matter arising from the audit of the financial statements that involves especially challenging, subjective, or complex auditor judgments. These matters are material and need to be communicated to the audit committee by the auditor. The problem with Critical Audit Matters (CAMS) is that it differs for each company, even within the same industry. This can alter from the changing risk environments, new accounting standards and policies, and also from the nature of complexity of each individual audit. The research involved identifying industries whose firms reported the largest numbers of CAMS as well as identifying the significant accounting areas to which those CAMS are related. The top 100 companies by market capitalization from S&P 500 index for the fiscal years 2021 and 2022 were studied and analyzed by the accounts, industries, and audit opinions from the audit reports. It was discovered that the accounting areas which reported more CAMS are revenue recognition, other contingent liabilities, and tax liabilities. Revenue recognition is a relatively new standard that requires substantial judgements and is the most significant account in the income statement. It was also observed that the technology, financial services and pharmaceutical industries reported 180% more CAMS than other industries due to the substantial assumptions and estimates required. For instance, the technology industry has very innovative revenue models which leads to more judgements and issues being reported.

Author: Katharine D. Drake
Publisher:
ISBN:
Category :
Languages : en
Pages : 50

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Book Description
Prior research indicates that expanded audit reports, which disclose financial statement matters that involved especially challenging, subjective, or complex auditor judgment (known as critical audit matters [CAMs] in the U.S.), have fallen short of their objective to provide investors with useful information. In this study, we investigate whether the disclosure of tax-related CAMs indirectly benefits investors by constraining tax-related earnings management. Such a finding would indicate that CAM disclosure has increased auditor and/or management scrutiny of the underlying financial statement areas. We find that tax-related CAM disclosures are associated with (1) a lower likelihood that the audited company uses tax expense to meet analysts' consensus forecasts, and (2) increases in the reported reserve for prior-period unrecognized tax benefits (UTBs). Our findings should assist the Public Company Accounting Oversight Board (PCAOB) with their post-implementation review of the new U.S. auditor reporting requirement.

Author: Christine Gimbar
Publisher:
ISBN:
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Languages : en
Pages :

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Book Description
The Public Company Accounting Oversight Board recently proposed amendments to the standard audit report that would require the disclosure of critical audit matters (CAMs), and the Securities and Exchange Commission continues to evaluate the use of principles-based (imprecise) accounting standards within U.S. generally accepted accounting principles. We assert that precise accounting standards are perceived by jurors to constrain auditors' control over financial reporting outcomes, resulting in a lower propensity for negligence verdicts when the accounting treatment conforms to the precise standard. However, we hypothesize that the use of either imprecise standards or CAMs removes this constraint, leading to increased auditor liability. We present experimental evidence, including a mediation analysis, supporting this argument. Our results highlight the similarities between the effects of imprecise accounting standards and CAMs on negligence assessments. The results provide insight for regulators and the profession about the potential interactive consequences of the proposed regulatory changes.

Author: Jeremy Vinson
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
A primary concern facing the PCAOB's requirement of disclosing critical audit matters (CAMs) is increased auditor litigation risk. Evidence with Key Audit Matters from the U.K. indicates auditors may subsequently remove a CAM or continue to report the same CAM for several years. Therefore, we investigate the effects of CAM removal and duration on jurors' assessments of auditor negligence when there is a subsequent material misstatement due to fraud in the account related to the CAM. Using the Culpable Control Model, we predict jurors will assess higher auditor negligence when a CAM is removed than when a CAM is reported and when a CAM is reported for multiple years than for one year. Results of our first experiment, in which the CAM relates to a more complex account, highlight a quandary auditors could face in the years subsequent to reporting a CAM such that removal of a CAM that had been reported for multiple years increases auditor liability. Results of our second experiment, in which the CAM relates to a less complex account, provides limited support that CAM removal increases liability. Our results should be of interest to academics, practitioners, and regulators regarding legal implications of the new CAM standard.

Author: Christine Gimbar
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
The U.S. Public Company Accounting Oversight Board recently proposed changes to the audit reporting model that would require auditors to disclose areas of high audit risk within the audit report. Concerns about the proposal's potential to increase auditor liability have been raised by practitioners and highlighted in the business press. In this paper, we review five recent experiments that directly relate to these concerns, identify patterns in the results, and discuss the implications of these findings for regulators and practitioners.

Author: Kelsey Brasel
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
Audit practitioners, academics, and attorneys have expressed concern that disclosing critical audit matters (CAMs) will increase jurors' auditor liability judgments when auditors fail to detect misstatements. In contrast, this study provides theory and experimental evidence that CAM disclosures, under certain conditions, reduce auditor liability judgments as jurors perceive that undetected fraudulent misstatements were more foreseeable to the plaintiff (i.e., the financial statement user suing the auditor). However, we find that CAM disclosures only reduce auditor liability for undetected misstatements that, absent CAM disclosure, are relatively difficult to foresee. Finally, CAM disclosures that are unrelated to subsequent misstatements neither increase nor reduce auditor liability judgments relative to the current regime (i.e., where CAMs are not disclosed), but reduce liability judgments relative to reporting that there were no CAMs. As such, we find that, relative to stating there were no CAMs, disclosure of any CAM (i.e., related or unrelated) provides litigation protection in cases of undetected fraud. Consequently, the CAM requirement could incentivize auditors to disclose innocuous boilerplate CAMs, thereby diluting the impact of more warranted CAM disclosures.