Do key audit matters impact financial reporting behavior?

• DOI: http://doi.org/10.1111/ijau.12190
• Author: Christiane Pott,Anna Gold,Melina Heilmann,Johanna Rematzki
• Date: 01 July 2020
• Published date: 01 July 2020

ORIGINAL ARTICLE

Do key audit matters impact financial reporting behavior?

Anna Gold

1,2

| Melina Heilmann

3

| Christiane Pott

3

| Johanna Rematzki

4

1

Vrije Universiteit Amsterdam, The

Netherlands

2

Norwegian School of Economics, Norway

3

TU Dortmund University, Germany

4

Independent Researcher, Germany

Correspondence

Anna Gold, Department of Accounting, School

of Business and Economics, Vrije Universiteit

Amsterdam, De Boelelaan 1105, NL-1081 HV

Amsterdam, The Netherlands.

Email: anna.gold@vu.nl

This study experimentally examines whether the implementation of key audit matters

(KAMs) in auditors' reports affects managers' reporting behavior. In line with prior

research in psychology, we argue that greater transparency through KAMs leads to

higher accountability pressure as managers may expect their judgments to be scruti-

nized more strongly in the presence of KAMs and, hence, to an improvement of

financial reporting quality. Further, we examine whether informational precision

(firm-specific versus nonfirm-specific information) in a KAM section moderates the

effect of KAM presence on reporting behavior. Our findings show that managers'

tendency to make an aggressive financial reporting decision is reduced in the pres-

ence of KAMs (compared to the absence of KAMs). This effect remains even when

the description of the KAM is of low informational precision. Thus, our results sug-

gest that KAMs serve as a beneficial mechanism for enhancing financial reporting

quality by attenuating aggressive financial reporting behavior, regardless of the preci-

sion employed by auditors.

KEYWORDS

accountability, audit regulation, financial reporting behavior, informational precision, Key

Audit Matters (KAMs)

1|INTRODUCTION

Standard-setters and audit regulators worldwide, including the Pub-

lic Company Accounting Oversight Board (PCAOB) and International

Auditing and Assurance Standards Board (IAASB), have recently ini-

tiated an expanded audit reporting model to respond to concerns

about the lack of transparency in auditor reports (IAASB, 2015;

PCAOB, 2017). One significant change in both PCAOB and IAASB

amendments is the implementation of key audit matters (KAMs),

which are new disclosure requirements providing information about

significant matters auditors encountered during the audit.

1

The pri-

mary objective of the new audit report is to communicate those

matters and to enhance investors' understanding of the auditor's

role and responsibility.

2

One essential benefit recognized by regula-

tors, but largely ignored thus far in the ongoing debate, is the effec-

tiveness of KAMs regarding the financial reporting environment.

Bruce Webb, chairman of the American Institute of Certified

Public Accountants auditing standards board, states “that the

presence of KAM sections in audit reports may cause management

to think more carefully about the quality and the robustness of

their processes and controls”(Katz, 2013).

3

This statement suggests

that KAMs may not only improve transparency for users of financial

statements, but also enhance managerial financial reporting

behavior. In this article, we experimentally examine whether

indeed KAM disclosures can mitigate aggressive financial reporting

behavior.

4

Our theoretical predictions are motivated by accountability the-

ory and findings from the disclosure transparency literature. Prior

accountability research indicates that the expectation that one may

be called upon to justify one's view to others affects judgment and

decision quality as individuals feel more pressure to provide justifiable

explanations and, hence, exert greater effort in their judgment and

Received: 2 July 2018 Revised: 16 January 2020 Accepted: 22 January 2020

DOI: 10.1111/ijau.12190

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reprodu ction in any medium,

provided the original work is properly cited.

© 2020 The Authors. International Journal of Auditing published by John Wiley & Sons Ltd

232 Int J Audit. 2020;24:232–244.wileyonlinelibrary.com/journal/ijau