Not All Critical Audit Matters (CAM) Are the Same: Evidence from Distinct and Diverse CAM Disclosures

• In Event: Informativeness of CAMs

Abstract

Prior research generally finds no financial statement user reactions to Critical Audit Matter (CAM) disclosures when considering the presence or absence of CAM paragraphs in the independent auditor’s report. We expand upon Burke et al. (2021), which finds that there is considerable variation in CAM disclosures, and identify instances of more topically distinct and lexically diverse CAM disclosures. We find that these CAM disclosures are associated with greater absolute abnormal returns surrounding the release of the audit report, and provide information for sophisticated market participants, as measured by improved analyst forecast accuracy. However, we find some evidence that these more diverse CAM disclosures may add to confusion among certain investors, as measured by increased bid-ask spread. Further, we provide evidence that our measures of distinct and diverse CAM disclosures are capturing additional information related to audit effort, as proxied by increased audit fees. Overall, our results indicate that not all CAM disclosures are the same, and provide evidence to researchers and regulators that a distinct and diverse subset of CAM disclosures provide information to users of the financial statements.

Authors

• Will Anding, Florida State University

• Allen D Blay, Florida State University

• Zahn Bozanic, Florida State University