The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

Abstract

This study examines the homogeneity of BIG4 audit reports after implementing key audit matters (KAMs) in the context of fair value accounting. We focus on reported KAMs and the procedures related to the fair values of investment properties, particularly those related to challenging management's estimations and valuation specialists' use. Our data consist of 235 individual audit reports from the real estate sector from 2017 to 2018 and cover 60% of the listed real estate companies in the EU, Switzerland, and Norway. We found that the BIG4 audit firms are not homogenous in their audit reports. There is a statistically significant difference among the BIG4 audit firms in reporting the challenge of management estimates and in the number of audit procedures. We also found that a country's legal origin plays a significant role when auditors report KAMs. Our findings contribute to the current audit quality and reporting literature.

The Impact of Environmental Uncertainty on the Relationship between Standards Quality, Accounting Estations Quality and Share Prices: An Empirical Study

“…This suggests that, in the case of an increase in EU level, the Big 4 auditing firms allow their clients to increase the extent of the accounting estimates compared to other auditing firms. This result is similar to that found in Deb et al (2022), Honkamäki et al (2022), Nagar et al (2019 and Zhang et al (2018). As a result, H6a is supported.…”

“…Therefore, it is possible that high audit quality restricts opportunistic behaviour when making accounting estimates and related disclosures in audit reports (ISA 701; ISA 706). In this context, the Big 4 audit companies are more likely than other audit companies to disclose the extent of client estimates and their audit procedures in KAMs (Honkamäki et al, 2022).…”

“…Those studies used both audit quality and characteristics of the chief executive officer (CEO) as indicators of the quality of the application of financial reporting standards. For instance, Honkamäki et al (2022) found that the Big 4 auditing companies differed significantly from other audit firms in terms of auditing management estimates. Lau (2021) shows that the accounting estimates disclosed in key audit matters (KAMs) (IAS 701) do not enhance earnings quality.…”

Audit(or) type and audit quality in emerging markets: evidence from explicit vs. implicit restatements

“…Empirical research exploring the differences in audit quality between big 4 and non-big 4 firms has yielded mixed results, further complicating the narrative (Khurana et al, 2021;Berglund et al, 2018). In addition, RAF 22,4 the presupposition of homogeneity within an audit firm and among auditors of a similar tier is equally contestable (Honkamäki et al, 2022;Hrazdil et al, 2020).…”

Disclosure of auditor risk assessments in expanded audit reports

“…They invoke institutional theory, specifically mimetic isomorphism, to explain their findings. Honkamäki et al. (2022) focus on Big 4 disclosure of KAMs relating to fair value in the real estate sector, finding significant differences between the Big 4 audit firms.…”