Does the Expanded Audit Report Enhance the Efficient Use of Accounting Information?

Abstract

This study proposes that information on key audit matters (KAMs) improves investors’ ability to efficiently understand the valuation implications of accruals, and thereby mitigate the accrual anomaly, and demonstrates supporting evidence based on a sample of Taiwanese public firms. In addition, in the post-adoption period, we find that both account- and entity-level KAMs reduce accrual anomaly. The overpricing of accruals is less pronounced if the number of KAMs is greater or KAMs relate to accounts with low accrual reliability. Our evidence should be of interest to regulators and investors, as it suggests that the expanded audit report enhances the efficient use of accounting information. JEL Classifications: M41.