Carlson, Tyler

The addition of Key Audit Matters (KAM) to standard audit reports is one of the most significant changes to the audit report in decades. However, research on the informativeness of KAMs to investors is mixed. I add to this literature by examining whether variation in how goodwill impairment KAMs (GIKAM) are determined influence their informativeness. I first develop a determinants model to predict when an audit client would receive a GIKAM and find that auditor quality (Big 4) and auditor independence (fee ratio) are negatively associated with the likelihood a client receives a GIKAM. I then use this model to create measures of unexpected GIKAMs to test the relationship between unexpected GIKAMs and market outcomes (price and volume). Using annual report date and three-day cumulative abnormal returns and abnormal trading volume, I find no relationship between unexpected GIKAMs and price or volume reactions. In my third hypothesis, I predict and find that GIKAMs are positively associated with goodwill impairment recognition using pooled and propensity score matched samples. These findings contribute to the growing literature on the usefulness of expanded audit reports as well as audit literature in general.