The Impact of Key Audit Matters Disclosure on Debt Cost: An Applied Study

Abstract

The purpose of the research: This study aims to investigate whether the disclosure of key audit matters (KAMs) in the expanded audit report impacts debt cost in Saudi environment. Data and methodology: The researchers conduct an applied study using a sample of 125 firm-year observations of listed firms within the main market on the Saudia Exchanges from 2021 to 2022. The disclosure of KAMs is indicated by three characteristics: number, length, and readability. The researchers use content analysis to measure disclosure of KAMs from annual reports and examines how it impacts the debt cost in companies. Findings: results demonstrated that readability of KAM disclosed is significantly and negatively associated with cost of debt, implying that the easier the KAM paragraph to read, the lower cost of debt. Furthermore, Clarity and simplicity of KAM disclosure enhance lenders’ ability to read and process the intended message, thus improving the communicative value and relieving lenders’ fears about the firm, hence, reducing the cost of debt. However, the number and the length of KAMs disclosed is not significantly associated with debt cost. Overall, this study suggests that there should be consideration of the auditors’ writing skills when hiring auditors, which play an important role in the readability of KAMs and debt cost.