Does the Reporting of Critical Audit Matters Affect Nonprofessional Investors’ Perceptions of Auditor Credibility, Information Overload, Audit Quality, and Investment Risk?

Abstract

ABSTRACTA new Public Company Accounting Oversight Board (PCAOB) standard requires the reporting of critical audit matters (CAMs) within the audit report. This change has lengthened the audit report but may provide investors with cues about auditor credibility and audit quality. Utilizing an experiment and 140 nonprofessional investors, we find evidence that the disclosure of a CAM improves perceived auditor credibility, but the disclosure also has the unintended consequence of increasing feelings of information overload. More importantly, the disclosure of a CAM has a significant, positive total effect on perceived audit quality. This effect, in turn, lowers investors’ perceptions of investment risk. These findings highlight the potential for CAMs to impact investor perceptions and, possibly, subsequent decision making.Data Availability: Data are available from the authors upon request.