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Effects of Key Audit Matter Standard and Audit Committee Proactiveness on Auditors' Judgments

Fri, October 9, 1:45 to 3:15pm, TBA

Abstract

We conduct an experiment to investigate the joint effects of a standard requiring key audit matter disclosures in the auditor’s report (“KAM standard”) and the proactiveness of the audit committee (AC) on auditors’ judgments. Results, based on 83 audit partners and managers from two Big 4 firms, indicate that the presence of a KAM standard reduces auditors’ propensity to communicate a client’s aggressive accounting estimate with a reactive (versus proactive) AC, even when the estimate involves high estimation uncertainty and falls below the range of estimates used by other companies. The presence of a KAM standard also increases auditors’ propensity to accept the client’s accounting estimate, but only when the AC is reactive and the estimate falls just within the range of estimates used by other companies. Our findings shed light on potential unintended consequences of KAM standard on auditors’ judgments and the moderating role of AC proactiveness.

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