Do Critical Audit Matters Provide Decision-Relevant Information to Investors? Evidence from Merger and Acquisition Announcements

Abbott, Lawrence J.; Buslepp, William L.

doi:10.2139/ssrn.4188255

Cited by 1 publication

(1 citation statement)

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“…3 Thus, if there is a meaningful CAM effect on reporting outcomes, we anticipate it should be detectable in the tax area. 2 See, for example, Andreicovici et al (2023), Camacho-Minano et al (2023, Nylen et al (2023), Hu et al (2023), Carrillo et al (2022), Abbott and Buslepp (2023), and Kuster et al (2023).…”

Section: Introductionmentioning

confidence: 99%

Disclosure of tax‐related critical audit matters and tax‐related outcomes

Drake,

Goldman,

Lusch

et al. 2024

Contemporary Accting Res

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Given that tax‐related critical audit matters (tax CAMs) were prevalent among accelerated filers (18.5% of observations) during the initial year of CAM disclosures, we examine whether an auditor's disclosure of tax CAMs is associated with variation in tax‐related financial reporting quality, tax avoidance, and tax‐related earnings management. Finding an association between tax CAMs and one of these tax outcomes would indicate that the new auditor reporting standard has indirectly affected investors. Examining the first year of CAM disclosures, we do not find that tax CAMs are associated with broad proxies of tax‐related audit or financial reporting quality (e.g., restatements, internal control weaknesses, comment letters) or tax avoidance (e.g., effective tax rates or book‐to‐tax differences). We do find that tax CAMs are associated with a modest increase in tax accrual quality, an increase in the reserve for uncertain tax benefits, and a reduction in the likelihood of tax‐related earnings management. However, we do not find these tax CAM effects persist into the second year of CAM reporting. Our evidence is consistent with tax CAM disclosures having a modest but short‐lived effect on companies’ reporting of tax accounts. Our findings should inform the PCAOB as they conduct their post‐implementation review of the new audit reporting standard.This article is protected by copyright. All rights reserved.

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