The Effect of Increased Audit Disclosure on Managers' Real Operating Decisions: Evidence from Disclosing Critical Audit Matters
Bentley, Jeremiah W., Lambert, Tamara A., Wang, Elaine (Ying)
The Accounting Review · 2021 · Volume 96 · Issue 1
Abstract
We investigate whether and how a “critical audit matter” (CAM) disclosure affects managers' real operating decisions in two contexts (issuing a loan thatdecreasesversusincreasesthe average risk profile of loan portfolios, or choosing tohedgeversusspeculateon commodity risk). We expect that a CAM disclosure increases disclosure costs and implies expanded auditor support for both types of activities, but we expect implied auditor support to be valued more highly for risk-increasing than for risk-decreasing activities. As a result, we predict that a CAM disclosure decreases managers' risk-decreasing activities (due to increased disclosure costs) more than managers' risk-increasing activities (as the implied auditor support counteracts the increased disclosure costs). We find evidence consistent with our prediction across multiple experiments. Our study sheds light on the unintended consequences of a CAM disclosure and provides insight to relevant parties as the new standard goes into effect.
Keywords
critical audit matters (CAMs), auditor reporting model, disclosure efficiency, managers' real operating decisions, operating distortion
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