Does KAM disclosure make a difference in emerging markets? An investigation into audit fees and report lag

Abstract

PurposeThis study investigates the consequences of the key audit matter (KAM) disclosure requirement by considering two salient audit proxies: audit fees and audit report lag. This investigation is relevant because most auditors worldwide are required to expand their audit report including discussion on key matters faced in the audit engagement. However, the emerging literature on the implications of KAM is inconclusive.Design/methodology/approachUsing a distinctive dataset of 601 year-observations for firms listed on the Omani capital market over 2012–2019, this study employs pooled panel data regression with robust standard error.FindingsResults indicate that auditors increased their fees considerably during the period of KAM but substantially shortened audit report lag. Conversely, using the KAM period as a sample, the authors find marginal or insignificant evidence for the effect of the number of KAM on both proxies. In additional analyses, this study shows that entity-level risk KAM is associated with higher fees and shorter audit report lag, while KAM related to account-level risk does not have the same effect. Interestingly, it is observed that KAM disclosure is strongly associated with higher fees and high-quality audit even when the auditors issue their report in a shorter time.Originality/valueThis study contributes to the limited research examining the consequences of KAM in emerging markets. It is also the first to show that KAM is associated with shorter audit report lag.

The impact of COVID-19 on audit fees and audit report lag: Evidence from Malaysian Islamic Banks

“…A previous study by Baatwah et al (2022) found a negative relationship between audit fees and audit report lag. In other words, high audit fees reduce audit report lag.…”

Does expanded disclosure in the audit report involve unintended consequences? Evidence from tax avoidance

“…Using a UK sample, they report that increasing RMMs in audit reports is associated with a significant increase in audit fees, suggesting that expanded audit report requirements such as KAMs have increased audit effort and audit quality. This finding is asserted by Li et al (2019) and Baatwah et al (2022b), who suggested that audit fees significantly increased following the KAMs disclosure requirement. Using an alternative proxy for audit effort, Baatwah et al (2022b) examined how KAMs disclosure requirements affect the audit report lag for listed firms in the Omani capital market.…”

“…This finding is asserted by Li et al (2019) and Baatwah et al (2022b), who suggested that audit fees significantly increased following the KAMs disclosure requirement. Using an alternative proxy for audit effort, Baatwah et al (2022b) examined how KAMs disclosure requirements affect the audit report lag for listed firms in the Omani capital market. They found that KAMs disclosure requirements are associated with a shorter audit report lag while maintaining higher-quality reports, arguing that auditors during KAMs requirements increase their effort by allocating more audit staff and time for audit engagements.…”

Insight of ISA 701: Key Audit Matter Disclosure in Extended Audit Report?

“…The intention is to focus on issues crucial to stakeholders' understanding of the financial statements and requiring special attention from the auditor. By employing this structured approach, the external auditor aims to enhance the transparency and clarity of the audit report, ensuring that users gain valuable insights into the critical aspects of the audit process and the associated financial reporting risks (Baatwah et al, 2022;Li et al, 2019). Ultimately, the disclosure of KAM contributes to a more informative and meaningful communication between auditors and stakeholders.…”