The Influence of Critical Audit Matters in the US on the Informativeness of Investors

In 2017, the PCAOB announced its new audit standard, AS 3101. One requirement is reporting critical audit matters (CAMs), starting June 30, 2019, for large accelerated filers. Using US data of CAM, we investigate whether the reporting of CAMs is informative for investors using a difference-in-differences approach and we use as proxies for investors’ informativeness, absolute abnormal returns and abnormal trading volume. Our motivation is to assess the relevance and the effectiveness of a new regulation aiming to improve audit quality. Overall, our findings provide some indications that the first-time implementation of CAMs might lead to investors avoiding those companies presumably because of uncertainty about the information being released. We also investigate the content of the CAM paragraph and do not find that the number, categories, or firm-specific/industry-common CAMs are value-relevant for investors. The results of this study provide insight into the new US auditor standard and the value-relevance of CAMs for investors. We suggest that standard setters should aim to improve the auditor report to make it more informational. Overall, our paper provides some evidence on the implementation and communicative value of the new CAM reporting, suggesting that CAMs are not informative for investors. We argue that this is the case potentially due to the additional information from CAMs which leads to complex information or information overload making investors less reluctant to invest on the companies with a significant number of CAMs reported.