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Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investors’ Decision to Invest?

Sat, January 18, 1:45 to 3:15pm, TBA

Abstract

Regulators and standard setters in the U.S. and abroad have recently proposed changes to the standard audit report, including a requirement to include a critical audit matter (CAM) paragraph. We examine how nonprofessional investors react to a CAM paragraph in the audit report. We find that investors are more likely to stop considering a company as an investment when provided a CAM paragraph that reports significant estimation uncertainty, as compared to investors who receive a standard audit report (an information effect) or investors who receive the CAM paragraph in management’s footnotes (a placement effect). We also find that the effect of a standalone CAM paragraph is reversed when it is followed by a paragraph offering assurance for the critical audit matter. Our findings should be of interest to regulators and standard setters as they consider the feasibility of CAM paragraphs and specific assurances associated with CAM paragraphs.

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