Internal Control Quality: The Role of Critical Audit Matters Reporting

We examine whether the 2019 introduction of critical audit matter (CAM) reporting in reports United States is associated with improvements issuers’ internal controls over financial reporting. propose that increased scrutiny by auditors on CAM-related matters may lead to early identification and client remediation material weaknesses control (ICMW). Analyses show compared companies, treatment companies (those CAM reporting) experience a statistically significant decrease both likelihood having an ICMW number ICMWs after reported. This result driven primarily account-level rather than entity-level ICMWs. also find issuers revenue-recognition CAMs have significantly fewer revenue-related other issuers, consistent notion related revenue recognition are identified remediated through auditor’s evaluation process. Results positive association between disclosure quality—that is, negative ICMWs—is more pronounced when auditor effort involved conclude focusing attention areas potential concern, leads quality