مقاله انگلیسی رایگان در مورد اهمیت موضوعات کلیدی حسابرسی – الزویر ۲۰۲۴

Abstract

This study examines whether there is a correspondence between auditor disclosures of key audit matters (KAMs) and management disclosures of significant accounting policies and estimates, following the introduction of the International Standard on Auditing (ISA) 701. In addition, we investigate how audit committees moderate the relationship. We employ a sample of Swedish listed firms (2016–۲۰۱۸), using measures that capture the extent and quality of management disclosures and how they relate to auditor KAM disclosures, including the number of accounting items disclosed, total number of words, and number of unique KAM-related words (via a “bag-of-word” technique). We find a positive correspondence between auditor and management disclosures, and the correlation is greater in firms with an audit committee. Additional analyses provide evidence that management disclosure quality increases after the introduction of ISA 701, but the positive effect is mostly found in firms with a separate audit committee on the board. The results are robust to alternative measures for disclosures and using a matched sample design. Our findings suggest that policymakers should consider the interplay between audit standards and audit committees.

Introduction

We study the correspondence between management disclosures of significant accounting policies and estimates in accordance with International Accounting Standard (IAS) 1 with the key audit matter (KAM) disclosures mandated by the International Standard on Auditing (ISA) 701.1 Auditors must consider “significant auditor judgments relating to areas in the financial statements that involved significant management judgment” (ISA 701, para. 9)—areas that contain risk-related information on significant accounting policies and estimates disclosed by managers under IAS 1 (para. 122 and 125).2 Though such disclosures inform financial statement users about management judgments, they are subject to managerial discretion in identifying significant accounting items and sources of uncertainty regarding key estimates (Christensen et al., 2012, Hodgdon and Hughes, 2016). Users can better assess managers’ accounting choices if managers provide additional information on how the choices are made. Managers disclose information depending on their incentives and the scrutiny level by which they make these choices. For instance, following changes in regulations to improve enforcement and firm governance, disclosures are documented to ensure more transparency (Hope, 2003, Cohen et al., 2007).

Enhanced auditor accountability, following ISA 701, increases the attention of auditors to management’s accounting choices (Gutierrez et al., 2018, Bédard et al., 2019, Reid et al., 2019, Gold et al., 2020). This increase affects how managers convey significant accounting policies and estimates. Increased auditor attention enhances managerial choice monitoring by auditors and investors (Gold et al., 2020), who can observe differences between auditor and management disclosures. Under the new standard, users become aware of previously undisclosed risks if auditors identify matters that management has not disclosed or considered. Increased monitoring induces managers to improve their disclosures out of concern for their standing in the job market (Hirshleifer and Teoh, 2003, Desai et al., 2006). Therefore, after the implementation of ISA 701 in 2016, the scrutiny of management disclosures of significant accounting policies and estimates by auditors and boards of directors should yield a positive correspondence between auditor and management disclosures.

Conclusion

We examine whether following the introduction of ISA 701 there is a correspondence between auditor disclosures of KAMs and management disclosures of significant accounting policies and estimates. Furthermore, we explore whether audit committees moderate the relationship between auditor and management disclosures. We show a correspondence between auditor and management disclosures and that disclosures significantly increased after the ISA 701 adoption in Sweden, especially among firms with an audit committee. Thus, the effectiveness of the audit regulation depends in part on the governance institutions in place as audit committees translate auditor inputs into actual accounting outputs. This conclusion is further supported by the fact that audit committees strengthen the noted correspondence after the implementation of ISA 701.

Our findings should have implications for policymakers in reviewing post-implementation effects of ISA 701 and when implementing new audit and accounting standards. Accordingly, they convey that the enhanced transparency in audit reports causes a second-order effect on the quality of management disclosures. The findings may interest policymakers focusing on improving the corporate governance of firms, as they suggest that having a separate audit committee enhances management disclosures and their correspondence with auditor disclosures.