AAA Spark Meeting of Regions

Costs and Benefits of Auditors’ Disclosures of Critical Audit Matters: Initial Evidence from the Early Adopters in the United States

• In Event: Audit Quality: Critical Audit Matters and Audit Risk Disclosures

Abstract

In an effort to make audit reports more informative to financial statement users, the PCAOB requires an expanded report for large accelerated filers whose fiscal year ends on or after June 30, 2019 (AS 3101) in which auditors are required to disclose critical audit matters (CAM). Using a sample of firms that have transitioned to the new regime and those that still issue audit reports in the traditional format, we examine the costs and benefits of the new auditing standard. Our evidence suggests that comparing to non-CAM disclosure auditor reports, the presence of CAM disclosure provides incremental information to equity investors in a more timely manner without a significant increase in audit fees. However, disclosing multiple CAMs in the auditor’s report result in higher audit fees and longer audit delays without bringing additional informational benefits.

Authors

• Yu Li, San Diego State University

• Yan Luo, San Diego State University