Why it Matters: The Key Role of the Audit Committee in Expanded Audit Reporting

• In Event: Audit Committees

Abstract

Regulators adopted expanded audit reporting standards in response to investors’ calls for greater transparency about the most important matters the auditor discussed with those charged with governance. However, researchers and regulators know very little about whether and how governance actors influence key audit matter (KAM) reporting quality. This study investigates how the audit committee’s (AC’s) cognitive diversity, demographic diversity, and power affect KAM quality. KAM quality refers to the transparency of the KAM report (number, length, readability, and tonal bias), and the tailoring of KAMs to specific engagement-years (textual and topical similarity to prior year KAMs and those of industry-year peers). I find that AC cognitive diversity in expertise, knowledge, and abilities is positively associated with KAM quality, and that this relation is stronger in firms with weaker information environments. I find limited evidence of associations between demographic diversity and KAM quality, providing evidence that professional rather than personal backgrounds shape the AC’s KAM oversight approach. I find that AC power has important, but mixed, implications for KAM quality. This study informs researchers, regulators, and practitioners about ongoing efforts to improve disclosure transparency at the intersection of audit assurance and corporate governance.

Author

• Linette M Rousseau, University of Wisconsin-Madison