The Effect of Key Audit Matters and Uncertainty Disclosures on Auditors’ Accountability Perception and Fair Value Decisions

• In Event: Complex Auditor Estimates and Judgments

Abstract

We experimentally examine whether and how recent changes to the audit reporting model impact auditor’s judgment and decisions. Specifically, we investigate how the effects of the requirements of disclosing key audit matters (KAMs) interact with related management disclosures in the financial statement footnotes to affect auditor’s accountability perceptions and subsequent fair value decisions. In an experiment comprising mainly audit partners from Big 4 accounting firms, we find that auditors believe they are less accountable when they have the opportunity to report on the fair value estimates in KAMs disclosures or when management has provided fair value related footnotes. However, despite the lower perceived accountability from either of these disclosures, we find that when both KAMs and footnotes are reported, auditors require greater fair value adjustments. Overall, our results show that the requirements to disclose KAMs does make a difference on auditors’ accountability perception and adjustment decisions. These results have important implications for regulators, audit practitioners, preparing entities and users of financial statements.

Authors

• Jin Ma, The University of Adelaide

• Paul J Coram, University of Adelaide

• Indrit Troshani, University of Adelaide