The effects of disclosing critical audit matters and auditor tenure on nonprofessional investors’ judgments

In an effort to provide more meaningful information to financial statement users, the Public Company Accounting Oversight Board (PCAOB) recently adopted sweeping changes to the audit report, requiring the audit firm to disclose whether or not it identified a critical audit matter (CAM) and its tenure with the client. To our knowledge, ours is the first study to explore how nonprofessional investors’ judgments are influenced by (1) the relative effects of a CAM disclosure versus a disclosure that the auditor did not identify a CAM, and (2) the disclosure of the audit firm’s tenure. We find that, relative to disclosing that no CAMs were identified, disclosing a CAM reduces investment intentions. We do not find a significant effect of tenure disclosure on investment intentions, despite evidence that participants attended to and understood the tenure manipulation. Concerning investors’ cognitive processes, we find that perceptions of both risk of material misstatement and management disclosure credibility mediate the effect of CAM disclosure on investment intentions, while perceived audit quality suppresses this effect. Our contributions include furthering the understanding of cognitive mechanisms through which CAM disclosure influences investment intentions, identifying a relatively unique setting in which perceptions of management disclosure credibility and audit quality move in opposite directions, and providing evidence that auditor tenure disclosure does not appear to affect investment intentions. Our findings should be of interest to regulators, auditors, issuers, and investors.     

Changes in audit effort and changes in auditors’ disclosures of risks of material misstatement

This paper investigates whether auditors' year-to-year modification to risks of material misstatements (RMMs) in extended auditors' reports (EARs) are associated with changes in underlying audit effort, as proxied by changes in audit fees. We examine the dynamics of RMMs over time in terms of adding or dropping specific RMMs. Our main results show that, on average, audit fees increase more from the previous year's fees when more RMMs are added to the current year's EAR. This increase is partially offset by dropping RMMs that were disclosed in the previous year, but changes in audit fees are not significantly affected by dropping RMMs without adding new RMMs. Further analysis suggests the effect of added RMMs is attributable to “new” RMMs originating with the auditor and that added RMMs that were previously known, based on related disclosures in the prior year's audit committee report, do not significantly impact on changes in audit fees. Overall, our results suggest that changes in the choice of RMMs included in EARs reflect changes in underlying audit effort.     

Influence of Value for Money Audit on Public Administrations: Looking Beyond Appearances

Value for money (VFM) auditing will soon have been part of the control environment in European and North American public administrations for thirty years, yet, despite its many interesting features, it has received very little attention from researchers. Chief among the VFM audit'sstill unexplored features, would doubtless be the value of its performance as an instrument to control and improve the management of public affairs. In order to partially fill this research gap, I am proposing 14 indicators to measure the effectiveness of VFM audits. But I don't stop there, for pointing out the successes or failures of VFM audits would finally be futile unless one also pointed to their causes. So, turning my attention to causes, I also propose 11 factors which can be used to explain the successes of Auditors General in carrying out VFM audits of public organizations as well as their inevitable failures.     

How do auditor rotations affect key audit matters? Archival evidence from South African audits

The expansion of the auditor's reporting duties with the introduction of critical or key audit matters (KAMs) has reignited interest in the determinants and consequences of the rules and regulations aimed at improving audit's functionality and quality. This paper expands on a growing body of work which investigates possible determinants of the KAMs being included in audit reports. It provides an original perspective on KAM identification and reporting in three ways. Firstly, the paper deals specifically with audit partner and firm rotations as possible KAM determinants. Secondly, hand-collected details are analysed to test for changes in the absolute number of KAMs as well as for KAMs added to or removed from audit reports to provide a more refined measure of how KAM disclosures are varying. Finally, data are gathered from South Africa to complement the empirical work which, to date, has largely focused on the U.S. and U.K. Our findings reveal a duality of stability and variability in how the requirement to report KAMs is being operationalised. A change in audit partner is not associated with changes in reported KAMs but changing audit firms appears to have a significant impact on the KAMs added to or removed from an audit report. The provisions of ISA 701 promote consistency in how KAMs are identified and disclosed by individual partners. However, ISA 701 cannot define and control every aspect of KAM determination. As a result, there is a degree of agency at the firm-level which allows for differences in how audit firms choose to implement the standard's provisions. Our study makes an important contribution by providing evidence of the complex interaction between standardisation of audit practice and sources of performative variability and may lend weight to the regulatory arguments in favour of mandatory firm rotation.     

Do Key Audit Matters Affect Operating Activities? Evidence from Inventory Management

We investigate whether and how the disclosure of key audit matters (KAMs) affects firms' real operating decisions by examining the association between inventory-related KAMs and firms' inventory management. Exploiting China's recent audit report reform, our difference-in-difference analysis reveals that after the reform, inventory management efficiency increases more for firms subject to inventory-related KAMs than for other firms and the effect is more pronounced for industries in which inventory is material. Further analyses show that inventory-related KAMs positively affect inventory management by attracting external attention and increasing auditor monitoring, which in turn improves inventory management efficiency and operating performance. Our findings suggest that KAM disclosure changes firms’ managerial behaviours and generates a positive externality on real operations.     

Is investment decision-making influenced by perceptions relating to auditors’ client dependence and amount of audit fees?

The objectives of this study are to examine whether investing decisions are affected by knowledge about the auditor's revenue dependence on a client and whether the amount spent by a company on audit fees affects decisions to invest in the company. A behavioral experiment is conducted where risk assessments and investing decisions are made for four hypothetical investing scenarios. The study finds that investing decisions are affected by knowledge about an auditor's revenue dependence on a client, but are not affected by knowledge about the size of a client's audit fees.     

Auditor specialization, perceived audit quality, and audit fees in the local government audit market

Prior governmental research implies a positive relation between auditor specialization and audit quality, but the effect of specialization on audit fees is mixed. However, no single governmental study investigates the effect of auditor specialization on both audit quality and audit fees. Also, prior studies focus on either large- or small audit firms and often employ indirect proxies for audit quality. We study the effects of auditor specialization on perceived audit quality and audit fees. Our data represent both Big 5 and smaller audit firms and include three market-based measures of specialization. We survey 241 Florida local government finance directors and find that specialization is positively associated with perceived audit quality but not with audit fees. We also find that Big 5 auditors, often used as a proxy for higher audit quality in prior research, are not uniformly associated with increased perceived audit quality but consistently charge higher audit fees. Our results confirm a relation between measures of audit firm specialization and audit quality and raise questions regarding audit firm size and audit quality in the municipal sector. Our findings suggest that engaging specialized auditors may be good policy for many local governments.     

Efficiency in the Pricing of the FTSE 100 Futures Contract

This paper studies the pricing efficiency in the FTSE 100 futures contract by linking the predictable movements in futures returns to the time-varying risk and risk premia associated with prespecified factors. The results indicate that the predictability of the FTSE 100 futures returns is consistent with a conditional multifactor model with time-varying moments. The dynamics of the factor risk premia, combined with the variation in the betas, capture most of the predictable variance of returns, leaving little variation to be explained in terms of market inefficiency. Hence the predictive power of the instruments does not justify a rejection of market efficiency.     

新审计报告降低了债务融资成本吗?

以2015〜2016年首批采用新审计报告的A+H股公司为处理组,以其他A股公司为控制组,考察了新审计报告是否影响债务融资成本。研究表明,新审计报告能显著降低上市公司债务融资成本,这一效应在信息环境较差、破产风险较高、规模较小及融资约束较大的公司更为显著;从该事项披露的具体类型来看,与资产确认与计量、重大资产交易和控制权问题相关的事项披露显著降低了债务融资成本,而公允价值计量相关的事项披露显著增加了债务融资成本。同时,在控制审计师积极的结论性评价后,与抵押资产相关的关键审计事项增加了债务融资成本。此外,关键审计事项数量越多、信息越充分、审计师应对措施越详细,企业债务融资成本降低越多。     

关键审计事项披露的模仿同构与股价同步性

基于组织社会学研究中的制度理论,以2016—2020年我国A股上市公司为样本,使用TF-IDF方法计算文本相似性指标,考察关键审计事项披露同构效应及其对资本市场信息效率的影响。结果表明：关键审计事项披露存在模仿同构效应,模仿导致的样板化披露会释放更多行业层面信息,减少公司特质信息进入股价,提升了个股的股价同步性。进一步的分析表明,关键审计事项披露同构效应对股价同步性的影响机制源于行业信息“过载”而非信息“降噪”,这种机制是通过影响分析师和机构投资者判断而发挥作用的。