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When Do Investors Value Key Audit Matters?

Author

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  • Robyn Moroney
  • Soon-Yeow Phang
  • Xinning Xiao

Abstract

While prior studies have considered the effect of the enhanced auditor’s report (EAR) on a range of auditor, management and investors’ judgments, we consider whether the inclusion of key audit matters (KAMs) in the EAR affects investor perceptions of the value of the audit as well as the credibility of the auditor. These are important issues linked to the rationale for the introduction of the EAR. As prior studies have demonstrated that audit firm size affects investor perceptions across a range of measures, we predict that the link between KAMs (absent versus present) and investor perceptions around value and credibility is affected by audit firm size. We find that the inclusion of KAMs improves perceived value and credibility only when a Non-Big 4 firm conducts the audit. When a Big 4 firm conducts the audit, perceived value and credibility are high whether KAMs are included or not. We also find that perceived credibility mediates the joint effect of KAMs and audit firm size on the perceived value of the audit. In additional analysis, we find that the inclusion of KAMs draws investors’ attention to new and expanded messages, taking their attention away from messages considered core to the audit report.

Suggested Citation

  • Robyn Moroney & Soon-Yeow Phang & Xinning Xiao, 2021. "When Do Investors Value Key Audit Matters?," European Accounting Review, Taylor & Francis Journals, vol. 30(1), pages 63-82, January.
    • Handle: RePEc:taf:euract:v:30:y:2021:i:1:p:63-82
    DOI: 10.1080/09638180.2020.1733040
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    Cited by:

    1. David Hay & Noel Harding & Chris Gan & Irene Ge & Linh Ho & Dinithi Ranasinghe & Harj Singh & Nigar Sultana & Shan Zhou, 2023. "Comments of the AFAANZ Auditing and Assurance Standards Committee on the Proposed Standard on Assurance Engagements over GHG Emissions Disclosure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4813-4820, December.
    2. David Hay & Noel Harding & Pallab Biswas & Chris Gan & Irene Qingling Ge & Linh Ho & Dinithi Ranasinghe & Harj Singh & Nigar Sultana & Shan Zhou, 2024. "Comments on Exposure Draft for Proposed ISSA 5000, sustainability assurance engagements by the Auditing and Assurance Standards Committee of AFAANZ," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 1221-1239, March.
    3. Wang, Qi & Zhang, Lin & Ma, Qianqun & Wu, Chong, 2024. "The impact of financial risk on boilerplate of key audit matters: Evidence from China," Research in International Business and Finance, Elsevier, vol. 70(PB).
    4. Sau Yu Ong & Robyn Moroney & Xinning Xiao, 2022. "How do key audit matter characteristics combine to impact financial statement understandability?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 805-835, March.
    5. Li, Valerie & Luo, Yan, 2023. "Costs and benefits of auditors' disclosure of critical audit matters: Initial evidence from the United States," Advances in accounting, Elsevier, vol. 60(C).
    6. Camacho-Miñano, María-del-Mar & Muñoz-Izquierdo, Nora & Pincus, Morton & Wellmeyer, Patricia, 2024. "Are key audit matter disclosures useful in assessing the financial distress level of a client firm?," The British Accounting Review, Elsevier, vol. 56(2).
    7. Clacher, Iain & Garcia Osma, Beatriz & Scarlat, Elvira & Shields, Karin, 2021. "Do commonalities facilitate private information channels? Evidence from common gender and insider trading," Journal of Corporate Finance, Elsevier, vol. 70(C).
    8. Nien-Su Shih, 2024. "Does Using the Extended Audit Report Decrease Information Asymmetry in Family Firms?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 14(1), pages 1-3.
    9. Hien Hoang & Robyn Moroney & Soon‐Yeow Phang & Xinning Xiao, 2023. "Investor reactions to key audit matters: Financial and non‐financial contexts," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3325-3349, September.
    10. Paul J. Coram & Yi (Dale) Fu & Mukush Garg & Noel Harding & David C. Hay & Mohammad Jahanzeb Khan & Nora Muñoz‐Izquierdo & Ashna Prasad & Nigar Sultana & Jamie Tong, 2022. "Comments of the AFAANZ auditing and assurance standards committee on proposed international standard on auditing ISA for LCE," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 4219-4244, September.
    11. Duboisée de Ricquebourg, Alan & Maroun, Warren, 2023. "How do auditor rotations affect key audit matters? Archival evidence from South African audits," The British Accounting Review, Elsevier, vol. 55(2).
    12. Ma, Jin & Coram, Paul & Troshani, Indrit, 2024. "The effect of key audit matters and management disclosures on auditors’ judgements and decisions: An exploratory study," The British Accounting Review, Elsevier, vol. 56(2).
    13. Guo, Mengmeng & Su, Yun & Zhao, Rui, 2024. "The effect of expanded audit report on IPO underpricing: Evidence from China," Emerging Markets Review, Elsevier, vol. 58(C).
    14. Kong, Dongmin & Ji, Mianmian & Liu, Shasha, 2022. "Does the mandatory disclosure of audit information affect analysts' information acquisition?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    15. Ma, Qianqun & Zhou, Jianan & Wang, Qi & Wang, Kongwen, 2024. "The impact of key audit matters on goodwill accounting and investment behavior: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 93(C).

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