The effect of key audit matters and management disclosures on auditors’ accountability perceptions and fair value decisions
34 Pages Posted: 23 Dec 2020 Last revised: 26 Dec 2023
Date Written: December 22, 2023
Abstract
We investigate how disclosure of key audit matters (KAMs) and related management footnote disclosures on a subjective accounting estimate relating to fair value in the financial statement footnotes affect auditors’ perceptions of their accountability and their subsequent adjustment decisions. In relation to accountability, a substitution effect is found between KAMs disclosures and footnotes. That is, auditors believe that they are less accountable either when they can report on the fair value estimates in KAMs disclosures, or when management has provided expanded fair value related footnotes. However, we find that when the fair value disclosure is considered by both KAMs and expanded footnotes it results in the auditor recommending a more conservative fair value adjustment decision. Overall, our results show that the requirement to disclose KAMs does make a real difference and interacts with management’s disclosures to affect auditors’ perceptions of accountability and their adjustment decisions.
Keywords: accountability; key audit matters; fair value decisions; audit report; disclosure; measurement uncertainty
JEL Classification: M41, M42, M48
Suggested Citation: Suggested Citation