Does the Reporting of Critical Audit Matters Affect Nonprofessional Investors’ Perceptions of the Readability of the Audit Report and Audit Quality?

• In Event: Interesting studies/unrelated topics

Abstract

The Public Company Accounting Oversight Board (PCAOB) recently adopted a new auditing standard that would require the auditor to report critical audit matters (CAMs) in the body of the audit report. This new standard will lengthen the audit report but may also provide investors with cues about the quality of the audit. This study examines whether the disclosure of a CAM reduces the readability of the audit report and whether it, either directly or indirectly, affects nonprofessional investors' perceptions of audit quality. We find that the disclosure of a CAM does not directly affect the quality of the audit. It does, however, lead to a less readable audit report that, unintentionally, causes investors to lower their perceptions of audit quality, and, as a result, increase their perceived risk of the investment when no real change in audit quality has taken place. Increasing the readability of the disclosures mandated by the PCAOB’s new auditing standard may, however, be able to eliminate these unintended, negative consequences.

Authors

• Brian Todd Carver, Clemson University

• Leah Elena Muriel, Oklahoma State University

• Brad Trinkle, Mississippi State University