Investor Response to Critical Audit Matter (CAM) Disclosures

Posted: 3 Mar 2020

See all articles by Rebecca Files

Rebecca Files

University of Texas at Dallas

Pinar Gencer

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: February 5, 2020

Abstract

As of June 30, 2019, the Public Company Accounting Oversight Board (PCAOB) requires that the new auditor’s report for large accelerated filers include a discussion of Critical Audit Matters (CAMs). The communication of CAMs is intended to increase the relevance of the auditor’s report for investors by disclosing accounts that require especially challenging, subjective, or complex auditor judgment. This study examines investor response to CAM disclosures for the first large accelerated filers in the United States. We find no statistically significant price or volume response around the CAM release dates in 2019. In additional tests, we explore and find variation in the semantic similarity between the CAMs disclosed in the auditor’s report and the risk factors disclosed by the firm in the same 10-K; however, we continue to find no statistically significant price or volume response for the CAMs containing more novel information compared to the firm’s own risk disclosures. Next, we consider the possibility that the information communicated in CAMs is disclosed by the firm in the prior year’s risk factor disclosure or financial statement footnotes. To test this, we analyze the semantic similarity between CAMs disclosed in 2019 and the risk factors and footnotes disclosed by the firm in both 2018 and 2017. We find relatively high similarly in disclosure content across years, verifying that many of the firms in our sample appear to have disclosed the same information that is communicated in CAMs in the prior year(s). However, even for those firms with very dissimilar disclosures, we continue to find an insignificant price and volume response in 2019. Overall, our results suggest that CAM disclosures for large accelerated filers do not communicate incremental information to investors. The information content of CAMs for smaller firms (e.g., non-accelerated filers) remains to be seen.

Suggested Citation

Files, Rebecca and Gencer, Pinar, Investor Response to Critical Audit Matter (CAM) Disclosures (February 5, 2020). Available at SSRN: https://ssrn.com/abstract=3532754

Rebecca Files

University of Texas at Dallas ( email )

800 West Campbell Road, SM 41
Richardson, TX 75080-3021
United States
9728835818 (Phone)

Pinar Gencer (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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