Does client importance affect key audit matters reporting? New Zealand evidence

Abstract

Purpose This study aims to examine the relation between a client’s relative economic importance to its auditor and the number of key audit matters (KAMs) reported in the expanded audit report. Design/methodology/approach The authors measure a client’s economic importance at the audit firm level as well as the audit partner level using the ratio of a client’s total fees to an auditor’s total fees earned from its listed clients and the ratio of a client’s audit fees to an auditor’s total audit fees from its listed clients. The authors estimate a multivariate regression model using a sample of New Zealand-listed company-years from 2017 to 2019. Findings Results reveal a positive relation between client importance to auditor and the number of KAMs disclosed. Furthermore, the positive association between client importance and the number of KAMs reported is more pronounced for clients audited by the Big 4 auditors and less experienced audit partners. These findings suggest that auditors’ incentive to protect against potential losses from important client engagements outweighs any impairment to auditor independence and leads to a higher number of KAMs reported for the economically more important clients. Overall, the results suggest that auditors report KAMs strategically to mitigate engagement risks. Originality/value This study provides the first evidence on how client economic importance relates to the disclosure in the expanded audit report and contributes to the dialogue on auditors’ reporting of KAMs in the Asia-Pacific region.