The Effect of Disclosing Critical Audit Matters in the Auditor’s Report on Perceived Auditor Responsibility for Misstatements

• In Event: Auditor Liability

Abstract

We design an experiment to test the effects of the PCAOB’s (2013) recent proposal to mandate disclosure of critical audit matters (CAMs) in the auditor’s report on financial statement users’ perceptions of audit assurance as well as assessments of auditor responsibility and liability for a subsequently discovered misstatement. Disclosing a financial statement area as being “critical” to the audit could elevate users’ perceptions of audit assurance and auditor responsibility for the CAM area, as audit firms fear. Alternatively, by pointing out the difficulty and subjectivity inherent to a CAM, such disclosures could lower users’ perceptions of audit assurance and responsibility. Our experimental findings present a consistent theme in support of the latter conclusion, as if a CAM disclosure is perceived as a partial disclaimer of auditor responsibility for the area identified as a CAM. Moreover, this finding is robust to the presence or absence of disclosed CAM-related audit procedures. Insofar as the PCAOB’s proposal warns auditors against using CAM wording to disclaim responsibility, the fact that we appear to observe such an effect from the PCAOB’s own suggested wording for CAM disclosures suggests an unintended consequence of the proposed standard that warrants further consideration.

Authors

• Steven J. Kachelmeier, The University of Texas at Austin

• Jaime J. Schmidt, The University of Texas at Austin

• Kristen Valentine, The University of Texas at Austin