Consequences of the Adoption of the Expanded Auditor’s Report: Evidence from Hong Kong and Mainland China

• In Event: Expanded Audit Reports

Abstract

Effective on December 15, 2016, the Hong Kong Institute of Certified Public Accountants issued a set of new and revised auditing standards that require a discussion of Key Audit Matters (KAMs). Effective since fiscal year 2017, the Chinese Institute of Certified Public Accountants issued similar auditing standards mandating the disclosure of KAMs. Exploring the staggered adoption of expanded auditor’s report, we investigate whether the disclosure of KAMs provides incremental information to investors and if the changes to the auditor’s report have indirect consequences for audit quality. Examining three years of data surrounding the two adoptions for companies listed in Hong Kong and Mainland China stock exchanges, we do not find evidence that KAMs provide incremental information to investors or that the new rules affect audit quality. We further conduct cross-sectional tests based on reporting companies’ information environment or KAMs content. We do no find consistent evidence that KAMs are associated with incremental information content or improved audit quality for companies are expected to benefit the most from such regulations. Our findings support investors’ continuing demands for additional and more specific information in the auditor’s report.

Authors

• Lin Liao, Southwestern University of Finance and Economics

• Miguel A Minutti-Meza, University of Miami

• Yun Zhang, george washington university

• Youli Zou, George Washington University