Real effects of reporting key audit matters on auditors' judgment and choice of action

This experimental study analyzes whether reporting an accounting estimate as a key audit matter (KAM) can influence auditor judgment about the accounting estimate and the corresponding action. We find that skeptical action in the form of proposed adjustment amounts is significantly lower when the accounting estimate is reported as a KAM. Thus, the disclosure of a KAM can serve as a moral license to waive an adjustment. Taking into account that the KAM disclosure does not affect auditors' skeptical judgments in the form of a reasonableness assessment of the accounting estimate, our results indicate the existence of a judgment–action gap. Furthermore, implicit client pressure does not enlarge the moral licensing effect of the KAM disclosure. We also find evidence that audit effort is not affected by reporting a KAM. Overall, our study contributes to the current debate about the audit reporting model by showing that reporting a KAM might have unintended “real effects” on auditors' actions.