Do Critical Audit Matters Affect Nonprofessional Investors’ Perceptions of the Fluency of the Audit Report, Audit Quality, and Investment Risk?

• In Event: 3.01 Critical Audit Matters and Norm Sensitivity

Abstract

The Public Company Accounting Oversight Board (PCAOB) recently adopted a new auditing standard that requires the reporting of critical audit matters (CAMs) within the audit report. This standard will lengthen the audit report, but may provide investors with cues about the quality of the audit. Utilizing a scenario-based experiment and 150 nonprofessional investors, we find that disclosing a CAM indirectly affects investor’s perceptions of the quality of the audit, through the perceived change in fluency. Investors now perceive the audit report to be less fluent, which is associated with lower perceptions of audit quality, and, as a result, an increase in their perceived risk of the investment, despite no perceived change in audit quality. These results provide insight to regulators, the auditing profession, audit committees, and financial statement preparers about the potential unintended consequences from the inclusion of CAMs, as they prepare for this change and begin drafting these disclosures.

Authors

• Brian Todd Carver, Clemson University

• Leah Elena Muriel, Oklahoma State University

• Brad Trinkle, Mississippi State University