AAA Spark Meeting of the Regions

The Effects of Attribution and Readability of Critical Audit Matter on Nonprofessional Investors’ Perceptions of Audit Quality and Valuation Judgments

• In Event: Critical Audit Matters / Audit Disclosures

Abstract

We examine how attribution of the critical audit matter (CAM) and the readability of the auditor response to the matter affect investors’ perceptions of audit quality and their valuation judgments. Using a controlled experiment with nonprofessional investor participants, we find that when auditor response is more readable, attributing CAM to the management of the audit client leads to higher perceived audit quality but lower valuation judgments of the client’s stock than attributing CAM to the nature of the account. However, when auditor response is less readable, CAM attribution has no effect on investors’ perceptions of audit quality or their valuation judgments. Our study adds to the recent accounting literature on critical audit matter and extends the literature on management attribution and financial disclosure readability. Our findings also have practical implications for regulators, auditors, and investors.

Authors

• Fangjun Xiao, San Jose State University

• Li Huang, Eastern Washington University