TY - JOUR

T1 - The impact of key audit matter (KAM) disclosure in audit reports on stakeholders’ reactions

T2 - A literature review

AU - Velte, Patrick

AU - Issa, Jakob

PY - 2019/9/4

Y1 - 2019/9/4

N2 - This article presents a literature review of 49 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 analyze 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). The authors stress that most of the included studies use experimental or archival data and analyze 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 behavior, most studies find no significant changes in auditor behavior. Furthermore, there are many insignificant results with regard to shareholders’ reaction in line with our stakeholder and behavioral agency framework. The literature review is especially useful for management decisions, because firm reputation May be positively or negatively influenced by KAM regulations.

AB - This article presents a literature review of 49 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 analyze 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). The authors stress that most of the included studies use experimental or archival data and analyze 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 behavior, most studies find no significant changes in auditor behavior. Furthermore, there are many insignificant results with regard to shareholders’ reaction in line with our stakeholder and behavioral agency framework. The literature review is especially useful for management decisions, because firm reputation May be positively or negatively influenced by KAM regulations.

KW - Management studies

KW - Audit quality

KW - Critical audit matters

KW - Earnings management

KW - Key audit matters

KW - Stakeholder agency theory

UR - http://www.scopus.com/inward/record.url?scp=85072210012&partnerID=8YFLogxK

U2 - 10.21511/ppm.17(3).2019.26

DO - 10.21511/ppm.17(3).2019.26

M3 - Journal articles

AN - SCOPUS:85072210012

VL - 17

SP - 323

EP - 341

JO - Problems and Perspectives in Management (PPM)

JF - Problems and Perspectives in Management (PPM)

SN - 1727-7051

IS - 3

ER -