The Determinants and Unintended Consequences of Expanded Audit Reporting: Evidence from Tax-Related Key Audit Matters

65 Pages Posted: 29 Oct 2020 Last revised: 23 Apr 2021

See all articles by Dan Lynch

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Aaron Mandell

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

Linette M. Rousseau

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: April 23, 2021

Abstract

This study examines the determinants and unintended consequences of tax-related key audit matters (KAMs). We argue it is important to examine constructs specifically related to KAM topics to draw valid inferences about expanded audit reporting. Tax KAMs provide this opportunity because tax expense is material to most firms, there is substantial risk in the tax function, and tax KAMs are prevalent and discuss a range of issues. Consistent with tax complexity increasing the difficulty of auditing tax expense, we find that firms with greater tax avoidance, greater tax risk, and larger deferred tax asset balances with greater estimation uncertainty are more likely to receive a tax KAM. In consequences analyses, we find that firms that stop receiving tax KAMs increase their future (but not concurrent) purchases of auditor-provided tax services, consistent with economic bond incentives threatening auditor independence. Firms that stop receiving tax KAMs also increase tax avoidance in subsequent years.

Keywords: Tax, Key Audit Matters, Critical Audit Matters, KAM, CAM, Disclosure, Expanded Audit Reporting, Auditor Independence

JEL Classification: H20, H25, M41

Suggested Citation

Lynch, Dan and Mandell, Aaron and Rousseau, Linette, The Determinants and Unintended Consequences of Expanded Audit Reporting: Evidence from Tax-Related Key Audit Matters (April 23, 2021). Available at SSRN: https://ssrn.com/abstract=3689349 or http://dx.doi.org/10.2139/ssrn.3689349

Dan Lynch (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Aaron Mandell

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

HOME PAGE: http://uwm.edu

Linette Rousseau

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

975 University Avenue
Madison, WI 53706
United States

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