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What matters in disclosures of key audit matters: Evidence from Europe
Author(s) -
Pinto Inês,
Morais Ana Isabel
Publication year - 2019
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/jifm.12095
Subject(s) - audit , accounting , reputation , business , auditor's report , auditor independence , litigation risk analysis , european union , joint audit , internal audit , law , political science , international trade
New regulation in the European Union has introduced the mandatory disclosure of key audit matters ( KAM s) to audit reports. The EU has identified KAM s as significant risks, significant transactions or events, or significant judgments by auditors. This paper aims to determine the factors that influence the number of KAM s that auditors disclose in the main European countries under the new regulation. We predict that the litigation risk, reputation loss, auditor–client relationship, precision of accounting standards, and the effect of regulators and supervisors’ activities affect the number of KAM s that auditors disclose. The sample consists of firms on the FTSE 100, CAC 40, or AEX 25 that have disclosed KAM s at the 2016 fiscal year‐end. In line with our hypotheses, the findings show that a higher number of business segments (complexity) and more precise accounting standards lead to the disclosure of a higher number of KAM s. Contrary to our expectations, the results indicate that a positive association exists between the audit fee and the number of KAM s disclosed. As audit fees can be related to higher client risk, this finding could indicate that litigation risk dominates any auditor–client dependence. Further, although auditors often view their audits of banks as complex, the findings show a negative association between banks and the number of disclosed KAM s. This evidence may be related to the fact that financial institutions are in a highly regulated and supervised industry that reduces the need to disclose the KAM s.