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This study uses difference-in-differences (DiD) analyses to examine the consequences of adopting the U.S. critical audit matter (CAM) disclosure requirement for preparers and users of financial reports. The CAM requirement is one of the largest expansions of the U.S. audit report since the 1940s. We document significant changes to financial statement footnotes referenced by CAMs, which suggests an indirect consequence where management disclosure changes in areas that are expected to be scrutinized following auditor-provided disclosure. Results also suggest that, on average, CAM disclosures do not provide incremental information to the market. To further examine market reaction, we develop well-specified prediction models for the expected number and subject areas of CAMs. We find limited initial evidence that the market reacts negatively when unexpected CAMs are disclosed. Overall, our findings provide insights on the new CAM standard and particularly demonstrate its relevance to management disclosure decisions and to the market. [ABSTRACT FROM AUTHOR]

PCAOB inspections repeatedly indicate deficiencies in audits of fair-value (FV) estimates, prompting regulators to improve the related auditing standards. We predict that auditor task-specific FV expertise, gained from work experience during the audit of FV measurements, can contribute to higher audit quality. Utilizing FV-related restatements and comment letters, we find that expertise in auditing Level 3 FV estimates at the office level is associated with greater FV audit quality. Level 2 FV expertise or national level FV expertise is not associated with higher FV audit quality. Following the receipt of a comment letter, we further find that auditor FV expertise is associated with lower comment letter remediation costs and higher FV disclosure quality. Finally, we find that the value relevance of Level 3 FV disclosures increases with the extent of auditor FV expertise. Collectively, our results highlight that auditor fair value expertise contributes to the credibility and usefulness of FV disclosures. [ABSTRACT FROM AUTHOR]

SUMMARY: This paper investigates the overall impact of and the information made available by the recent audit partner disclosure requirement in the U.S. After a contentious comment period, the PCAOB released Rule 3211, which requires registered public accounting firms to disclose the name of the audit partner for every audit report it issues. In the first year of adoption, we find a significant increase in audit quality and audit fees and a significant decrease in audit delay. We collect information on partner gender, busyness, education, and social connections to explore whether these newly observable characteristics are associated with audit outcomes. We find that several of these characteristics are associated with variations in audit fees and audit delay, but no evidence of an association with audit quality. Overall, our findings suggest that the disclosure of partner name in Form AP enhances the audit information environment, which supports PCAOB motivation for Rule 3211. [ABSTRACT FROM AUTHOR]

SUMMARY: Voting in directors' elections is one of few mechanisms by which shareholders can influence corporate governance choices. We study elections of directors who serve on the audit committee (AC), a topic receiving little attention in past work. Our results show that AC members, especially those who do not serve on the compensation or nominating committees, receive greater shareholder support than other independent board members. We further find that among AC members, more qualified members, in terms of accounting expertise, receive greater support, while AC chairs without such expertise receive lower support. In addition, when the AC is less effective in monitoring the financial reporting process, its members receive lower shareholder approval, while other independent board members are less affected by these same financial reporting factors. Finally, when the AC is less effective, all of its members receive lower support, irrespective of their expertise or position within the committee. [ABSTRACT FROM AUTHOR]

We propose a new measure of accounting reporting complexity (ARC) based on the count of accounting items (XBRL tags) disclosed in 10-K filings. The preparation and disclosure of more accounting items is complicated because it requires greater knowledge of authoritative accounting standards. This aspect of complexity can increase the likelihood of mistakes, incorrect application of GAAP, and can ultimately lead to less credible financial reports. Consistently, we find that ARC is associated with a greater likelihood of misstatements and material weakness disclosures, longer audit delay, and higher audit fees. In comparison to commonly used measures of operating and linguistic complexity, the associations between ARC and these outcomes are more consistent, exhibit greater explanatory power, and have stronger economic significance. These and additional validation and robustness tests suggest that ARC more completely reflects accounting complexity. In addition, ARC exhibits several advantageous properties, including across- and within-firm variation, availability for the universe of SEC filers, and a direct connection to accounting, inherent in its derivation from detailed accounting disclosures. Finally, because it relies on a comprehensive set of detailed accounting data, ARC broadly captures accounting complexity, while, at the same time, it can be disaggregated into account-specific measures of complexity. [ABSTRACT FROM AUTHOR]

We examine whether shareholder votes can influence the audit committee and whether this influence is uniform across non-staggered and staggered boards. We find that through voting, shareholders can increase the efficacy of the audit committee, leading to improvements in audit committee structure, diligence, and financial reporting quality. These results hold only in firms with non-staggered boards, underscoring the need to separately examine staggered and non-staggered boards. Importantly, the non-responsiveness of staggered audit committees to shareholder disapproval presents an additional explanation for the weaker performance that is often documented for firms with staggered boards. Overall, our results support the movement to de-stagger boards. [ABSTRACT FROM AUTHOR]

Calls from practice suggest that audit committee members with industry expertise can improve audit committee effectiveness. Nevertheless, regulators and the extant literature have focused on the financial expertise of the audit committee. We posit that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company's operations within a particular industry. Taking a holistic view, we examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two measures of external auditor oversight (audit and nonaudit fees). As predicted, we find that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise. We also find that in certain instances, supervisory experts who are also industry experts perform better than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with accounting expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process. [ABSTRACT FROM AUTHOR]