The Effect of Increased Audit Disclosure on Managerial Decision Making: Evidence from Disclosing Critical Audit Matters.

• In Event: Effects of expanded audit reporting

Abstract

The Public Company Accounting Oversight Board (PCAOB) proposed a standard that requires auditors to provide information on “critical audit matters” (CAMs) identified during the financial statement audit. We use this context to examine whether and why increased auditor reporting impacts managers’ decision making. Using a 2x3 between-participants experimental design, we manipulate the purpose of a financial transaction (hedge versus speculation) and the type of CAM disclosure anticipated (No CAM versus Standard CAM verses Disclaimer CAM). Compared to the No CAM condition, we find managers in the Standard CAM condition are less likely to hedge, but more likely to speculate. A disclaimer CAM disclosure (related to the scope of the auditor’s assurance role) attenuates the impact of CAM disclosure on speculation. We contribute to literature on audit, financial, and managerial decision making and the debate over the proposed regulation.

Authors

• Jeremiah Bentley, University of Massachusetts-Amherst

• Tamara A Lambert, Lehigh University

• Ying Wang, University of Massachusetts-Amherst