Nusrat Jahan accepted for publication in AUDITING: A Journal of Practice & Theory
Mike Ilitch School of Business Assistant Professor of Accounting Nusrat Jahan has been accepted for publication in AUDITING: A Journal of Practice & Theory, which investigates critical audit matters and disclosure requirement for auditors in the context of goodwill impairment recognition.
The article, titled “Does Goodwill-related Critical Audit Matters Disclosures influence Firm’s Financial Reporting Decisions? Evidence from Goodwill Impairment,” was co-authored by Dr. Md Sydul Karim, Assistant Professor of finance at Lawrence Technological University.
We investigate whether the new critical audit matters (CAMs) disclosure requirement for auditors under the PCAOB standard AS 3101 affects audited firms' financial reporting decisions in the context of goodwill impairment recognition. We argue that an auditor's intense engagement with management and the audit committee in the CAMs determination and evaluation process improves management's information sets. Specifically, we report that the propensity to recognize goodwill impairment loss increases for firms with goodwill-related CAM disclosure relative to those without. This result is more pronounced when the likelihood of expected impairment is higher, suggesting that CAMs reporting lowers managers' discretion in delaying impairment loss recognition. Additionally, we find that goodwill-related CAM disclosure increases the length and use of uncertain words in goodwill-related footnote disclosure by management but has no significant impact on audit costs. Overall, these findings suggest that adopting CAMs requirements can reduce management's discretion in financial reporting decisions.