Does Considering Key Audit Matters Affect Auditor Judgment Performance?

Abstract

We investigate the impact of considering key audit matters (KAM) on auditor judgment performance and conducted a 2×2 between-subjects experiment based on a goodwill impairment testing case with 73 experienced auditors. We manipulated the two independent variables KAM consideration (present vs. absent) and client pressure (high vs. low). As dependent variables, we captured skeptical judgment and action as different facets of auditor judgment performance. Our results suggest that auditors' reaction to our client pressure manipulation is rather weak. If at all, auditors seem to become slightly more skeptical in their judgments and actions when client pressure is high, which might suggest that a reasonableness constraint has been triggered. Furthermore, we find that auditors exhibit significantly less skeptical judgment when KAM consideration is present than when KAM consideration is absent. This suggests that, when considering KAM, auditors are more willing to acquiesce to their clients' desired accounting treatments due to moral licensing. JEL Classification: M42

Real effects of reporting key audit matters on auditors' judgment and choice of action

“…These results indicate a moral licensing effect by which auditors, due to the additional reference to matters of higher uncertainty in the KAM paragraph, can feel more “morally licensed” to circumvent adjustments in the financial statements. Although such behavior has been documented in prior studies focusing on other disclosure requirements (Griffin, ; Koch & Schmidt, ; Loewenstein et al, ), we provide preliminary evidence that KAM reporting can have the same unintended consequences in the field of judging accounting estimates (Ratzinger‐Sakel & Theis, ). Taking into account that the KAM disclosure does not affect auditors' skeptical judgments, these combined results further corroborate the existence of a judgment–action gap (H1c).…”

“…Compared with a situation where the KAM reporting requirement is absent, an auditor's propensity to accept the aggressive estimate also increases. A working paper by Ratzinger‐Sakel and Theis () focused on possible effects of the new auditor reporting model on auditors' judgment performances. Our conceptual setting is quite different, because we differentiate between auditors' skeptical judgments and corresponding skeptical actions in order to investigate the potential existence of a judgment–action gap.…”

“…Our conceptual setting is quite different, because we differentiate between auditors' skeptical judgments and corresponding skeptical actions in order to investigate the potential existence of a judgment–action gap. Whereas Ratzinger‐Sakel and Theis () solely examined the likelihood to require an adjustment, we also focus on the adjustment amount to get a more precise measure for auditors' skeptical actions and consider audit effort as another dimension of skeptical action.…”

“…Auditors thus exhibited a more imprudent JDM concerning estimates subject to a KAM compared with the scenario without a KAM reporting requirement. Although the moral licensing effect is well known and has been reported for other forms of disclosures (Griffin, ; Koch & Schmidt, ; Loewenstein, Cain, & Sah, ), it is rarely explored in the context of the KAM reporting requirement (Ratzinger‐Sakel & Theis, ).…”

Key audit matters: insight from audit experts

“…This has been described as an effort to convince users of the appropriateness of the audit procedures performed (Bhattacharjee et al , 2017). Whilst there have been numerous studies examining the virtues of KAM and the related concerns from an international perspective, as well as studies forecasting or attempting to pre-empt what the effect of KAM may be (Kachelmeier et al , 2017; Ratzinger-Sakel and Theis, 2017), few studies have examined this from a South African perspective. South Africa’s audit environment is currently under a cloud of controversy (FM, 2017) with one of the “Big 4” audit firms implicated in a state capture scandal and another being scrutinised for its potential involvement in a significant international accounting and tax scandal.…”