Carol Callaway Dee, Bing Luo, Elaine Wang, Jing Zhang
{"title":"Critical audit matters and internal control quality: The disciplining role of CAM reporting","authors":"Carol Callaway Dee, Bing Luo, Elaine Wang, Jing Zhang","doi":"10.1016/j.jacceco.2025.101834","DOIUrl":null,"url":null,"abstract":"We examine whether critical audit matter (CAM) reporting improves internal controls over financial reporting. We propose that CAM reporting improves internal control quality. This is because CAM reporting incentivizes early identification and communication of internal control issues among auditors, management, and audit committees, and increases their attention and effort in high-risk CAM areas. We find that, compared to control companies, companies that implement CAM reporting experience a significant decrease in the likelihood of internal control material weaknesses (ICMWs), and the improvement in internal control quality is primarily at account-level rather than entity-level controls. We also find that CAM reporting significantly lowers the likelihood of accounting misstatements. Cross-sectional analyses suggest that the benefit of CAM reporting on internal control quality depends on audit committee quality and auditor effort. The survey results of audit partners and CFOs provide further support for our theory.","PeriodicalId":42721,"journal":{"name":"International Journal of Economics Management and Accounting","volume":"77 1","pages":"101834"},"PeriodicalIF":0.3000,"publicationDate":"2025-09-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Journal of Economics Management and Accounting","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1016/j.jacceco.2025.101834","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
We examine whether critical audit matter (CAM) reporting improves internal controls over financial reporting. We propose that CAM reporting improves internal control quality. This is because CAM reporting incentivizes early identification and communication of internal control issues among auditors, management, and audit committees, and increases their attention and effort in high-risk CAM areas. We find that, compared to control companies, companies that implement CAM reporting experience a significant decrease in the likelihood of internal control material weaknesses (ICMWs), and the improvement in internal control quality is primarily at account-level rather than entity-level controls. We also find that CAM reporting significantly lowers the likelihood of accounting misstatements. Cross-sectional analyses suggest that the benefit of CAM reporting on internal control quality depends on audit committee quality and auditor effort. The survey results of audit partners and CFOs provide further support for our theory.