Key Audit Matters Disclosures (KAMs) and Financial Reporting Quality: The Moderating Role of KAMs-Related Audit Efforts in Joint vs. Single Audit Markets

Abstract

This paper investigates how the quality of key audit matters (KAMs) disclosures and KAMs-related audit efforts interact to improve financial reporting quality, and how these effects vary by audit regimes, joint versus single audits and Big Four participation. Drawing on agency and signalling theories, we posit that under joint audit regimes, the quality of KAMs disclosures constrains managerial discretion more effectively when auditors allocate significant efforts to audit procedures related to KAMs, and that Big Four involvement amplifies these mechanisms. Using UK- and French-listed companies from 2017 to 2021, we find that the interaction of KAMs disclosures quality and KAMs-related audit efforts significantly enhances financial reporting quality in joint audit markets but not in single-audit settings. This effect is further strengthened when a Big Four auditor is involved in a joint audit. These associations hold under alternative accrual specifications, real-activities controls, COVID-19 adjustments and auditor tenure. Our study contributes to the literature by operationalizing agency and signalling theories through the interaction of two text-based measures, KAMs disclosure quality and KAMs-related audit efforts, shedding light on their combined effect on financial reporting quality within joint and single audit settings. The findings also offer practical benchmarks for audit committees and regulators by identifying conditions, such as audit regimes and Big Four involvement, under which KAMs disclosures are most effective.