The impact of key audit matter (KAM) disclosure in audit reports on stakeholders’ reactions: a literature review
04 Sep 2019-Problems and perspectives in management (Patrick Velte, Jakob Issa)-Vol. 17, Iss: 3, pp 323-341
TL;DR: In this paper, the authors present a literature review of 39 empirical studies on key audit matter disclosure in audit reports, focusing on five major streams of empirical research that analyse the impact of KAM disclosure on stakeholders' reactions: shareholders, debtholders, external auditors, boards of directors, and other stakeholders.
Abstract: This article presents a literature review of 39 empirical studies on key audit matter (KAM) disclosure in audit reports. The study involves a structured literature review on KAM disclosure based on the reactions of stakeholders. The limitations of former studies and useful recommendations for research are stressed. Five major streams of empirical research that analyse the impact of KAM disclosure on stakeholders’ reactions are focused: (1) shareholders (e.g. investors’ perceptions of auditors’ responsibility and litigation, value relevance and investors’ decisions); (2) debtholders (e.g. loan contracting terms); (3) external auditors (e.g. audit processes and audit fees); (4) boards of directors (e.g. earnings management); and (5) other stakeholders (e.g. informational value for suppliers and customers). We stress that most of the included studies use experimental or archival data and analyse the impact of KAM disclosure on investor reactions in a US-American setting. As the international standard setters assume a positive impact of KAM on stakeholder reactions, mixed empirical results are found. Although there are some indications of decreased earnings management behaviour, most studies find no significant changes in auditor behaviour. Furthermore, there are many insignificant results with regard to shareholders’ reaction in line with our stakeholder and behavioural agency framework. Our literature review is especially useful for management decisions because firm reputation may be positively or negatively influenced by KAM regulations.
Citations
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TL;DR: In this article, the effect of key audit matters (KAM) in the auditor's report as required by the new ISA 701 is investigated, considering investment professionals and non-professional investors.
Abstract: We investigate the effect of key audit matters (KAM) in the auditor’s report as required by the new ISA 701. We consider investment professionals and non-professional investors in our experiments, ...
47 citations
Cites background from "The impact of key audit matter (KAM..."
...5For comprehensive reviews of the academic literature on KAM, see for example: Gold & Heilmann, 2018; Velte & Issa, 2019....
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TL;DR: In this article, the authors investigate the factors that auditors take into consideration when issuing KAMs, with a focus on the number of KAM disclosures issued by auditors.
Abstract: In Southeast Asia, auditors play a crucial role in the quality of financial reports. With the introduction of a new format of auditors’ report that requires disclosure of key audit matters (KAM), the disclosure practice of auditors is, thus, of great interest. Specifically, this study aims to investigate the factors that auditors take into consideration when issuing KAMs.,The research design is quantitative, with a focus on the number of KAM disclosures issued by auditors. As existing studies rely on the number of KAM disclosures in the analysis, this current research, thus, uses the quantity of KAM disclosures for comparison purposes. The analysis relies on secondary data and multiple regression analysis is used to establish the association between the number of KAM disclosures and three groups of determining factors, namely, auditor characteristics, corporate governance mechanisms and firm characteristics.,The significant determining factors of KAM disclosure include auditor’s litigation risk, firm complexity, profitability and industry type. Firms using a Big 4 audit firm, firms with many subsidiaries and firms in the technology, property and construction and finance industries have higher numbers of KAMs, while highly profitable firms issue lower numbers of KAMs. As for corporate governance mechanisms, the number of KAMs is significantly positively correlated with the number of independent directors (p < 0.10).,This research includes key corporate governance parties in the examination, including external auditors, independent directors and audit committees. The finding affirms the influence of Big 4 on KAM disclosure in Southeast Asia, while their roles are not significant in Western samples. The result also unearths the monitoring role of independent directors in KAM disclosure. The role of the audit committee in KAM disclosure is insignificant in Thai samples, while the committee role is statistically significant in the Western samples. Variations in the findings between this study and previous research could be attributed to differences in institutional settings between both regions.
21 citations
TL;DR: In this article, the authors examine the perceived post-implementation impacts on audit quality of the KAM reforms (ISA 701) after the initial two years of implementation and how auditors have responded, explored through the lens of institutional logic.
Abstract: The purpose of this study is to understand how the new reforms related to key audit matters (KAM) disclosures in Australia may have impacted audit quality by eliciting the perceptions of key stakeholders in the audit and assurance services market.,The study uses a qualitative approach and New Institutional Sociology (NIS) to explain how auditors have responded to the KAM reforms. Interviews were conducted with 20 individuals representing identified groups of stakeholders in the market for audit and assurance services in Australia.,The study finds there is little consensus between some stakeholder groups on whether the KAM reforms may have improved audit quality, based on the perceptions shared. The findings conveyed that the auditors and regulators, standard setters acknowledge that KAM disclosures are either costly and/or time-consuming to implement. The Big Four auditors indicate these reforms led to changes mainly around internal consultations and independent reviews, whereas the non-Big Four auditors highlighted increased interactions with audit clients.,This is one of the first studies to examine the perceived post-implementation impacts on audit quality of the KAM reforms (ISA 701) after the initial two years of implementation and how auditors have responded, explored through the lens of institutional logic.
14 citations
Journal Article•
TL;DR: In this paper, the authors test the possible relationship between KAM reporting and common share price of listed companies from the alternative capital market in Thailand namely the Market of Alternative Investment (MAI).
Abstract: From the mixed results of previous related literatures, the study’s objective mainly aimed to test the possible relationship between Key Audit Matters (KAM) reporting and common share price of listed companies from the alternative capital market in Thailand namely the Market of Alternative Investment (MAI). Using 127 out of 160 MAI firms, 381 corporate annual reports during 2016 to 2018 were used as the samples. KAM reporting and corporate characteristics were collected from annual reports, while the MAI’s website namely SETSMART was used to collect corporate common share price of the samples. Descriptive analysis, correlation matrix and panel data analysis were used to analyze the data. As the results, the study found a significantly negative relationship between KAM reporting and common share price. Moreover, industry type and profitability had positively correlated with common share price. Main contribution of this study was that KAM reporting can provide accurate information value of communication compared with the traditional audit reporting to corporate investors for decision making as well as reducing information asymmetry.
7 citations
Cites background or methods from "The impact of key audit matter (KAM..."
...Firstly, there were few studies to investigate KAM reporting in emerging-economy countries (Gunno and Penawuthikul, 2018; Suttipun, 2020) compared with the KAM reporting in developed countries (Vanstraelen et al., 2012; Bedard et al., 2015; Prices and Scott, 2018; Velte, 2018; Velte and Issa, 2019)....
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...To reduce the probability of omitted variable bias, this study included control variables that were adopted from the previous related studies (Tangruenrat, 2015; Smith, 2017; Suttipun, 2020; Velte, 2018; Velte and Issa, 2019)....
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...A number of countries have already incorporated KAM reporting into their regulatory framework, including the United Kingdom, European Union countries, Australia, New Zealand, and Singapore (Bedard et al., 2015; Pries and Scott, 2018; Velte, 2018; Velte and Issa, 2019)....
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...…prior studies which have tested the relationship between audit reporting including KAM reporting, and common share price (Vanstraelen et al., 2012; Bedard et al., 2015; Srijunpetch, 2017; Prices and Scott, 2018; Velte, 2018; Boonyanet and Promsen, 2018; Limaporn et al., 2019; Velte and Issa, 2019)....
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References
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TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.
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27,773 citations
"The impact of key audit matter (KAM..." refers background in this paper
...Behavioral agents are characterized by temporal discounting, preferences related to uncertainty, fairness expectations and loss aversion (Kahneman & Tversky, 1979)....
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TL;DR: In this paper, the authors argue that audit quality is not independent of audit firm size, even when auditors initially possess identical technological capabilities, and when incumbent auditors earn client-specific quasi-rents, auditors with a greater number of clients have more to lose by failing to report a discovered breach in a particular client's records.
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"The impact of key audit matter (KAM..." refers background in this paper
...1 According to DeAngelo (1981), audit quality represents the ability of an auditor to detect material misstatements and to report the breach, if not corrected....
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TL;DR: The canonical agency problem can be posed as follows as discussed by the authors : the agent may choose an act, aCA, a feasible action space, and the random payoff from this act, w(a, 0), will depend on the random state of nature O(EQ the state space set), unknown to the agent when a is chosen.
Abstract: The relationship of agency is one of the oldest and commonest codified modes of social interaction. We will say that an agency relationship has arisen between two (or more) parties when one, designated as the agent, acts for, on behalf of, or as representative for the other, designated the principal, in a particular domain of decision problems. Examples of agency are universal. Essentially all contractural arrangements, as between employer and employee or the state and the governed, for example, contain important elements of agency. In addition, without explicitly studying the agency relationship, much of the economic literature on problems of moral hazard (see K. J. Arrow) is concerned with problems raised by agency. In a general equilibrium context the study of information flows (see J. Marschak and R. Radner) or of financial intermediaries in monetary models is also an example of agency theory. The canonical agency problem can be posed as follows. Assume that both the agent and the principal possess state independent von Neumann-Morgenstern utility functions, G(.) and U(.) respectively, and that they act so as to maximize their expected utility. The problems of agency are really most interesting when seen as involving choice under uncertainty and this is the view we will adopt. The agent may choose an act, aCA, a feasible action space, and the random payoff from this act, w(a, 0), will depend on the random state of nature O(EQ the state space set), unknown to the agent when a is chosen. By assumption the agent and the principal have agreed upon a fee schedule f to be paid to the agent for his services. T he fee, f, is generally a function of both the state of the world, 0, and the action, a, but we will assume that the action can influence the parties and, hence, the fee only through its impact on the payoff. T his permits us to write,
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"The impact of key audit matter (KAM..." refers background in this paper
...AGENCY THEORETICAL FOUNDATION According to stakeholder agency theory, an external auditor acts as an agent for shareholders and other stakeholders (Hill & Jones, 1992; Ross, 1973; Jensen & Meckling, 1976; Chow, 1982)....
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TL;DR: This paper pointed out that the "quality" of earnings is a function of the firm's fundamental performance and suggested that the contribution of a firms fundamental performance to its earnings quality is suggested as one area for future work.
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