Earnings management reactions to key audit matters

Abstract

This paper aims to investigate the earnings management (EM) reactions of firms to the key audit matters (KAMs) disclosed in expanded audit reports. Although previous literature has extensively investigated the interconnection between EM and different risks, little research to date examines the association between KAMs and EM strategies, considering both real earnings management and accruals earnings management. To test the hypotheses, we use a sample of UK listed companies over the period 2013 to 2018. The results show a different relationship between KAMs disclosed in the extended audit report and EM strategies. In particular, findings reveal that EM strategies differ according to the number of KAMs, the type of KAMs and each specific type of KAMs. The article contributes to a better understanding of the effect of financial information transparency and accounting quality.