“The impact of key audit matter (KAM) disclosure in audit reports on

stakeholders’ reactions: a literature review”

Patrick Velte https://orcid.org/0000-0001-5960-8449

AUTHORS http://www.researcherid.com/rid/H-1488-2017
Jakob Issa

Patrick Velte and Jakob Issa (2019). The impact of key audit matter (KAM)
disclosure in audit reports on stakeholders’ reactions: a literature review.
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Problems and Perspectives in Management, 17(3), 323-341.
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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

Patrick Velte (Germany), Jakob Issa (Germany)

The impact of key audit

BUSINESS PERSPECTIVES
matter (KAM) disclosure
in audit reports
on stakeholders’ reactions:
LLC “СPС “Business Perspectives”
a literature review
Hryhorii Skovoroda lane, 10,
Sumy, 40022, Ukraine
Abstract
www.businessperspectives.org
This article presents a literature review of 49 empirical studies on key audit matter
(KAM) disclosure in audit reports. The study involves a structured literature review on
KAM disclosure based on the reactions of stakeholders. The limitations of former stud-
ies and useful recommendations for research are stressed. Five major streams of em-
pirical research that analyze the impact of KAM disclosure on stakeholders’ reactions
are focused: (1) shareholders (e.g. investors’ perceptions of auditors’ responsibility and
litigation, value relevance and investors’ decisions); (2) debtholders (e.g. loan contract-
ing terms); (3) external auditors (e.g. audit processes and audit fees); (4) boards of
directors (e.g. earnings management); and (5) other stakeholders (e.g. informational
value for suppliers and customers). The authors stress that most of the included stud-
Received on: 22nd of April, 2019 ies use experimental or archival data and analyze the impact of KAM disclosure on
Accepted on: 30th of July, 2019 investor reactions in a US-American setting. As the international standard setters as-
sume a positive impact of KAM on stakeholder reactions, mixed empirical results are
found. Although there are some indications of decreased earnings management behav-
ior, most studies find no significant changes in auditor behavior. Furthermore, there
are many insignificant results with regard to shareholders’ reaction in line with our
stakeholder and behavioral agency framework. The literature review is especially use-
© Patrick Velte, Jakob Issa, 2019 ful for management decisions, because firm reputation may be positively or negatively
influenced by KAM regulations.

Patrick Velte, Professor, Accounting, Keywords key audit matters, critical audit matters, audit quality,
Auditing and Corporate Governance, earnings management, stakeholder agency theory
Institute of Management, Accounting
and Finance, Leuphana University of JEL Classification M410, M420
Luneburg, Germany.
Jakob Issa, Ph.D. student,
Professorship for Accounting,
Auditing and Corporate Governance,
INTRODUCTION
Institute of Management, Accounting
and Finance, Leuphana University of
Luneburg, Germany.
After the 2008–2009 financial crisis, stakeholders widely criticized
public interest entities’ (PIEs’) financial reporting and external audi-
tors’ reporting. Longer and more complex annual and audit reports
are associated with a high risk of information overload and impaired
usefulness for decision-making regarding the capital market (Bédard
et al., 2016; Gimbar et al., 2016). In particular, private investors and
other kinds of unsophisticated stakeholder groups find it difficult to
extract relevant information for their financial analyses. Information
asymmetries and conflicts of interest among the board of directors,
auditors, share- and debtholders and other stakeholders lead to an ex-
This is an Open Access article,
pectation gap (Bédard et al., 2016; Gold et al., 2012). In reaction to the
distributed under the terms of the huge concern among stakeholders, many regulators introduced ex-
Creative Commons Attribution 4.0
International license, which permits
tended auditor reporting (see Table 1) for PIEs in recent years. Reduced
unrestricted re-use, distribution, information asymmetry, increased financial reporting and audit qual-
and reproduction in any medium,
provided the original work is properly ity and increased value relevance of audit reports are the main goals
cited. of audit reporting regulations. In France, justifications of assessments

http://dx.doi.org/10.21511/ppm.17(3).2019.26 323
Problems and Perspectives in Management, Volume 17, Issue 3, 2019

(JOA) have been required since 2003 (Haut Conseil des Commissaires aux Comptes, 2006). Moreover,
the UK Financial Reporting Council (FRC) implemented new disclosure rules regarding the significant
risks of material misstatement (RMM) in the audit reports of companies with premium listings of equi-
ty shares on the main market of the London Stock Exchange (LSE) since the fiscal year beginning on 1
October 2012 (FRC, 2013). In 2015, the International Auditing and Assurance Standards Board (IAASB),
as the international audit standard-setter, implemented key audit matters (KAM) for business years af-
ter December 14, 2016 (IAASB, 2015). Finally in 2017, the US-American Public Company Accounting
Oversight Board (PCAOB) introduced the disclosure of critical audit matters (CAM) (PCAOB, 2017).
Table 1 presents the four main types of extended auditor reporting. Considering the notable interde-
pendency between the four items, the low amount of JOA and RMM studies, the recent change from
RMM and JOA to KAM in the UK and France and the many researchers who use the term KAM, we
favor KAM in our literature review. If there are specific differences between CAM/KAM, RMM and
JOA in our research results, we will explain them in detail. Otherwise we will only use the term KAM
in our analysis.

In comparison to recent literature reviews on extended auditor reporting (e.g. Gimbar et al., 2016;
Bédard et al., 2016), we chose a different review strategy and identified five major streams of empirical
research that analyze the impact of KAM disclosure on stakeholders’ reactions. Most of the 49 empirical
studies concentrate on the influence of KAM on (1) shareholders (e.g. investors’ perceptions of auditor
responsibility and litigation, value relevance and investors’ decisions) and found mixed results. The
same applies for (2) debtholders as another relevant stakeholder group, but very few studies have been
conducted on it so far. KAM disclosure should also have an impact on (3) external auditors’ behavior
(e.g. audit processes and audit fees). But most of the empirical research does not find any significant
results. While KAM disclosures in the audit report mainly addressed external stakeholders, another
stream of research analyses the impact of KAM disclosure on (4) the board of directors. Most of the

Table 1. KAM and other extended auditor reporting variables

Extended
Risks of material
auditor Critical audit matters Justifications of
Key audit matters (KAM) misstatement
reporting (CAM) assessments (JOA)
(RMM)
variable
Haut Conseil des
UK FRC 2013 (ISA UK
Institution IAASB 2015 (ISA 701.9) US-American PCAOB 2017 Commissaires aux
and Ireland 700)
Comptes 2006 (France)
The auditor shall determine, from the
matters communicated with those
charged with governance, those
matters that required significant
auditor attention in performing the Any matter arising
audit. In making this determination, from the audit of the
the auditor shall take into account the financial statements
Matters that are
following: that was communicated
Risks of material important for the
• areas of higher assessed risk of or required to be
misstatement that understanding of the
material misstatement or significant communicated to the
had the greatest financial statements,
risks identified in accordance with audit committee and
Content effect on the audit, e.g. implementation
ISA 315 (revised); relates to accounts or
the application of of accounting policies,
• significant auditor judgments disclosures that are
materiality, and the critical accounting
relating to areas in the financial material to the financial
scope of the audit estimates and elements
statements that involved significant statements and involved
of internal control
management judgment, including especially challenging,
accounting estimates that have subjective, or complex
been identified as having high auditor judgment
estimation uncertainty;
• the effect on the audit of significant
events or transactions that occurred
during the period

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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

included studies find a negative impact on earnings management as assumed. Finally, some studies also
include (5) other stakeholders, typically based on stakeholders’ broad comments on regulations, and
state an increased informational value of KAM disclosure.

Our structured literature review contains useful recommendations for future research and is also rel-
evant for regulators and practice. Based on the five streams of research, we identify whether the goals
of the regulators have been achieved. We also determine how different stakeholders are integrated into
recent research activities. After providing a foundation on stakeholder and behavioral agency theory, we
highlight the main results of empirical KAM research on different stakeholder groups, explain the stud-
ies’ key limitations and give useful recommendations for future research. Finally, we provide a summary
of the main results. The results of our literature review are especially relevant for management strategies
(e.g. earnings management, management reporting) as extended auditor reporting can mainly influ-
ence stakeholder reaction and thus firm reputation.

1. AGENCY THEORETICAL audit reports can significantly influence capital

market reactions (Bédard et al., 2016; Gimbar et
FOUNDATION al., 2016). As audit quality cannot be observed
According to stakeholder agency theory, an exter- by stakeholders, the audit report is a key infor-
nal auditor acts as an agent for shareholders and mation tool. However, the informational value
other stakeholders (Hill & Jones, 1992; Ross, 1973; of the audit report and related market reactions
Jensen & Meckling, 1976; Chow, 1982). External are mainly affected by the expectation gap phe-
audits are intended to increase stakeholders’ trust nomenon due to agency conflicts (Liggio, 1974).
in financial statements. The auditor serves as a The expectation gap represents the difference be-
gatekeeper or public watchdog for the stakehold- tween stakeholders’ assumptions concerning the
ers (Kraakman, 1986). Publication of the audit re- purpose and range of the audit and the real audit.
port with KAM disclosures should ensure appro- According to the famous approach proposed by
priate audit quality1 and financial reporting qual- Porter (1993), the expectation gap can be divided
ity2 in line with stakeholders’ interests (Ittonen, into a performance gap and a reasonableness gap
2012). Empirical audit research has proved that (see Figure 1).
Source: Porter (1993).

Perceived performance Expectation gap Society’s expectations

of auditors of auditors

Performance gap Reasonableness gap

Unreasonable expectations

Deficient performance Deficient standards

Figure 1. Structure of the expectation gap

1 According to DeAngelo (1981), audit quality represents the ability of an auditor to detect material misstatements and to report the breach,
if not corrected. Thus, auditor reporting is part of audit quality.
2 According to Gaynor et al. (2016), higher quality financial reports “are more complete, neutral, and free from error and provide more
useful predictive or confirmatory information about the company’s underlying economic position and performance”. Research on audit
quality and financial reporting quality is classified by various interdependencies. Audit reporting refers to the audited financial statements
and is clearly linked with financial reporting from a stakeholder perspective. Thus, the use of financial reporting variables (e.g. degree of
earnings management) in order to analyze audit quality is common in empirical research. However, as the external auditor only evaluate
the legality of financial reporting and not its firm profitability (e.g. usefulness of accounting policies), financial reporting quality does not
automatically lead to better audit quality and vice versa (Gaynor et al., 2016).

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Problems and Perspectives in Management, Volume 17, Issue 3, 2019

Prior research states that financial statement users transparent audit report can decrease the expecta-
often expect an absolute and not a reasonable level tion gap and increase stakeholders’ trust (Gold et
of external audits, and a guarantee of the absence al., 2012). KAM disclosures include firm-specific
of fraud or financial distress (Gold et al., 2012), re- information about an audit of financial statement
sulting in the reasonableness gap. This gap occurs (Bédard et al., 2016; Gimbar et al., 2016). They
when stakeholders lack knowledge about the audit portray an individual picture of the main critical
risk model of the external auditor. Audit risk can accounting topics or items in a company (Velte,
be separated into inherent risk, control risk and 2018). According to stakeholder agency theory,
detection risk. Audit risk is the risk of submitting KAM disclosures contribute to lowering informa-
an unqualified audit opinion with substantial er- tion asymmetry and conflicts of interest between
rors in the financial reporting. Inherent risks (e.g. management and stakeholders and decreasing the
business risk) and control risks (e.g. an insufficient expectation gap (Fuller, 2015). Stakeholder agency
internal control system) cannot be influenced by theory assumes heterogeneous interests between
the external auditor himself; he can only influ- stakeholders and expects homogeneous interests
ence detection risk, as he may choose between dif- within a stakeholder group. Furthermore, it ac-
ferent kinds of audit proof. A key goal of exter- cepts the rational behavior of the principal(s) and
nal audits is to lower audit risk to an appropriate the agent(s), and the risk-neutrality of the agents.
level (5% on average) with reference to materiality As we will discuss in the next chapter, archival re-
and efficiency. KAM disclosure can lower the rea- search is the dominant research method used to
sonableness gap as the stakeholders can be better analyze the macro-economic impacts of KAM
informed about the range and limits of external disclosure on stakeholders’ reactions (e.g. Almulla
audits (Velte, 2018). The performance gap, the sec- & Bradbury, 2018).
ond part of expectation gap, can be linked to de-
ficient performance and standards (Porter, 1993; In contrast to stakeholder agency theory, KAM
see Figure 1). International regulations on KAM disclosures can lead to adverse or no stakehold-
disclosure indicate that prior auditor reporting er reactions, in line with behavioral agency the-
standards were not decision-useful for stakehold- ory (Wiseman & Gomez-Mejia, 1998; Pepper &
ers as they did not get firm-specific information Gore, 2015). Behavioral agents are characterized
about the audit process and the outcome (Bédard by temporal discounting, preferences related to
et al., 2016). Furthermore, as external auditors uncertainty, fairness expectations and loss aver-
are also economic agents, a lower degree of audi- sion (Kahneman & Tversky, 1979). Accepting be-
tor reporting can lead to decreased performance havioral aspects allows the principal(s) to have
and quality incentives. Thus, KAM disclosure may different levels of risk aversion and thus allows
decrease all main sources of the expectation gap heterogeneity within a stakeholder group. Risk-
in line with regulators’ assumptions (FRC, 2013; averse principals are likely to evaluate KAM dis-
IAASB, 2015; PCAOB, 2017). closures more negatively in comparison with oth-
er stakeholders (Velte, 2018), because they may
Empirical research on the expectation gap can be concerned about the reported management
be separated into three major streams (Gold et discretions regarding these accounting topics or
al., 2012). One stream focuses on the existence of items (Sirois et al., 2018). Recognition of irrational
the expectation gap in several countries. The sec- behavior and heterogeneity within a stakeholder
ond stream analyzes the influence of stakehold- group is very useful in experimental research (e.g.
ers’ sophistication (i.e. level of experience and Klueber et al., 2018). Analysis of micro-economic
knowledge) regarding financial reporting and and individual personal factors (e.g. degree of so-
auditing on the expectation gap. In contrast to phistication of investors) can be easily conducted
professional investors, private investors and other by experiments, which we will describe in the next
stakeholders with lower knowledge are more de- section. Adopting a special part of behavior theo-
pendent on audit reports (Porter, 1993). The third ry, some researchers consider moral licensing and
research stream relates to the impact of differenc- motivated reasoning to be cognitive bias prob-
es in wording in the audit report on the expecta- lems (Asbahr & Ruhnke, 2018; Ratzinger-Sakel &
tion gap. Prior research stresses that a precise and Theis, 2017). According to these approaches, audi-

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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

tors feel more morally licensed to accept material work and present the impact of KAM disclosure
misstatements by the client after the introduction on (1) shareholders, (2) debtholders, (3) external
of KAM disclosure. Thus, KAM disclosure is not auditors, (4) the board of directors, and (5) other
an accountability mechanism, but a tool or license stakeholders (see Figure 2).
for unconsciously justifying an auditor’s decision
to waive an adjustment (Asbahr & Ruhnke, 2018). To select our studies, we used several internation-
In summary, KAM disclosure may be linked with al databases (e.g. Web of Science, Google Scholar,
increased, decreased or no impact on accounting Social Science Research Network (SSRN), EBSCO,
quality, audit quality and stakeholder reactions ScienceDirect) and specific terms (e.g. “key audit
based on stakeholder agency and behavioral agen- matters”, “critical audit matters”) in combination
cy theory. with “audit reporting”, “audit quality”, or compa-
rable terms. Restriction to a specific timeframe
was not useful in light of the discipline’s newness.
2. LITERATURE REVIEW OF Some literature reviews on well-established re-
search topics are limited to published or accepted
EMPIRICAL RESEARCH ON journal articles to ensure appropriate quality and
KAM homogeneity of the included studies. However,
for KAM, this strategy would lead to a rather low
2.1. Sample selection, research amount of studies. In line with the literature re-
framework and methods view conducted by Bédard et al. (2016), work-
ing papers and dissertations are included in our
As the development of empirical KAM research sample. Our structured analysis of research on
is relatively new, there have been no explicit lit- KAM was conducted by considering all types of
erature reviews to date. Bédard et al. (2016) con- research methods, including experimental stud-
ducted a literature review on US reform activities ies, archival studies and qualitative analyses (e.g.
concerning auditor reporting (e.g. going concern interviews, surveys, content analysis). Since KAM
opinions, audit partner signatures, CAM), and was recently regulated in many countries, the
KAM disclosure is only one topic that is covered. possibilities for archival research are still limited.
Furthermore, Gimbar et al. (2016) presented the Therefore, it is not surprising that research focuses
results of selected experimental studies concern- on experimental studies (Kachelmeier et al., 2017).
ing CAM’s influence on auditor litigation. Our With one exception (Velte, 2018), only the conse-
structured literature review contributes to the quences of KAM disclosures have been considered.
present body of literature, because it focuses on Possible determinants of KAM or country-specific
KAM disclosures without any limitations regard- effects have not been analyzed. We only include
ing research methods or region, stresses the limi- English working papers, dissertations or journal
tations of former studies and gives useful recom- articles in view of the international reach. KAM,
mendations for research and practice. We rely on a CAM, RMM and JOA are included in our sample.
stakeholder agency and behavioral agency frame- If there are any significant differences with regard

KAM disclosures in the audit report

Implications on…

Board of directors Shareholders and

External auditors Other stakeholders
(e.g. audit committee) debtholders

Figure 2. Research framework

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Problems and Perspectives in Management, Volume 17, Issue 3, 2019

to the extended auditor reporting variables, we 2.2. Shareholders

will emphasize them. Otherwise, in order to in-
crease readability of our literature review, we only 2.2.1. Results
use the term KAM.
As a first research stream, eight US-American ex-
Table 2 provides an overview of the number of periments analyze the impact of KAM disclosures
included contributions per stakeholder and their on investors’ perceptions of auditor responsibil-
year of publication, the regions examined and the ity and litigation (Backof et al., 2018; Brasel et al.,
journals in which the contributions were published 2016; Brown et al., 2016; Doxey, 2014; Gimbar et al.,
or the working papers. All studies were published 2016; Kachelmeier et al., 2017; Vinson et al., 2018; A.
or prepared within the last years (2014–2018), with Wright & S. Wright, 2014; see Table 3). There is some
a clear increase in the number of studies published evidence that KAM disclosures increase investors’
in 2018. Most empirical research on KAM focuses perception of auditors’ negligence (Backof et al., 2018;
on investors’ reactions in a US-American setting Vinson et al., 2018), responsibility (Kachelmeier et al.,
and adopt an experimental design. In addition, 2017), independence and credibility (Doxey, 2014)
most research was published as working paper. In and liability (Gimbar et al., 2016). But KAM infor-
view of the latest regulation initiatives regarding mation can also decrease auditors’ responsibility in
KAM and the long review duration in top inter- cases of a future bankruptcy (A. Wright & S. Wright,
national journals, this is not surprising. We also 2014). There are also insignificant results with regard
identify more research activity in 2018 concerning to auditor litigation (Brasel et al., 2016) and misbe-
the implications of KAM on the board of directors havior (Brown et al., 2016).
(e.g. management reporting, audit committee) and
external auditors. Accounting and auditing jour- As a second research strength, seven experiments
nals are the primary publication strategies. analyze the impact of KAM on value relevance
Table 2. Count of published papers cited
External
Papers Shareholders Debtholders Board of directors Other stakeholders
auditors
Panel A. By publication year
2014: 3
2014: 1
2015: 1 2016: 1 2016: 1 2014: 1
2015: 1
49 2016: 6 2017: 1 2017: 1 2017: 2
2016: 1
2017: 5 2018: 1 2018: 6 2018: 1
2018: 9
2018: 7
Total: 49 22 3 8 12 4
Panel B. By regime
• Canada: 1 • France: 1
• France: 1
• France: 1 • New Zealand: 2
• Germany: 1 • Germany: 2
• Germany: 1 • The Netherlands: 1 • Denmark: 1
49 • Macedonia: 1 • New Zealand: 2
• New Zealand: 1 • UK: 3 • Worldwide: 3
• UK: 1 • UK: 2
• UK: 4 • USA: 4
• USA: 1
• USA: 14 • Germany: 1
Total: 49 22 3 8 12 4
Panel C. By journal
• Corporate Social
Responsibility and • Accounting
• Accounting Horizons: 1 • Accounting and Environmental Horizons: 1
• Auditing: 1 Management Management: 1 • African Journal of
• Review of
• Behavioral Research in Information • Maandblad voor Accounting, Auditing
Accounting
Accounting: 1 Systems: 1 Accountancy en and Finance: 1
49 Studies: 1
• Current Issues in Auditing: 1 • International Bedrijfseconomie: 1 • Australian Accounting
• Working paper/
• Review of Accounting Studies: 1 Journal of • Review of Review: 1
dissertation: 7
• The Accounting Review: 1 Auditing: 1 Accounting • International Journal
• Working paper/dissertation: 16 • Working paper: 1 Studies: 1 of Disclosure and
• Working paper/ Governance: 1
dissertation: 9
Total: 49 22 3 8 12 4

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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

and investor decisions (Christensen et al., 2014; Smith, 2017). On the other hand, some research-
Dennis et al., 2016; Kipp, 2017; Köhler et al., 2016; ers found insignificant results (Bédard et al., 2018;
Pelzer, 2016; Rapley et al., 2018; Sirois et al., 2018) Gutierrez et al., 2018; Lennox et al., 2017). Carver
and six archival studies (Almulla & Bradbury, and Trinkle (2017), Smith (2017) also analyzed the
2018; Bédard et al., 2018; Gutierrez et al., 2018; impact of KAM on audit report readability and
Lennox et al., 2017; Reid et al., 2015; Smith, 2017; found mixed results (increased readability: Smith,
see Table 3). The experimental studies indicate 2017; decreased readability: Carver & Trinkle,
that specific KAM disclosure behavior can in- 2017).
fluence specific investors: a separate KAM para-
graph in comparison to management’s footnotes In sum, we argue that recent experimental and ar-
(Christensen et al., 2014), a graphic illustration ofchival research on the influence of KAM disclo-
KAMs (Dennis et al., 2016), detailed information sure on investors’ perceptions is rather heterogene-
about related audit procedures (Kipp, 2017), re- ous. This result is in line with our stakeholder and
strictions on professional investors (Köhler et al., behavioral agency framework. On the one hand,
2016), on risk-seeking investors (Pelzer, 2016) and KAM disclosure may lead to an increased expecta-
on one or two KAMs (Sirois et al., 2018). Rapley tion gap, as risk-averse shareholders that perceive
et al. (2018) found reduced investment intentions. an increased audit risk may leave the company.
The heterogeneity of investors’ preferences aligns They may blame external auditors for the increase
with the behavioral agency framework. in firm risks and don’t trust them with regard
to irrational behavior. On the other hand, KAM
In contrast to these results, the results of the ar- disclosure can lead to a lower expectation gap as
chival studies are more heterogeneous. On the shareholders are better informed about the scope
one hand, KAM is stated to be value relevant for of external audits and, at minimum, risk-neutral
investors (based on abnormal rents or trade vol- or risk-seeking shareholders honor information
ume; Almulla & Bradbury, 2018; Reid et al., 2015; transparency with capital engagement.
Table 3. Overview of empirical research regarding the impact of KAM and other related information
on shareholders
Year of
publication/ KAM and
State, sample,
status of Author(s) other related Dependent variable Main results
time period
working information
paper
Experiments and interviews (individual reactions)
Auditors are more negligent
2018
USA, 242 students Investor perception on by CAM existence; clarifying
(working Backof et al. CAM
(private investors) misbehavior of auditor reasonable assurance in the
paper)
CAM mitigates this effect
CAM disclosures reduce
auditor liability only if the
USA, 528 participants undetected fraudulent
of “Amazon’s Investor perception of misstatements were more
2016 Brasel et al. CAM
Mechanical Turk” auditor litigation risk foreseeable to the plaintiff;
(private investors) no impact by CAMs that are
unrelated to subsequent
misstatements
USA, 239 participants
2016 of “Amazon’s No effect of CAM disclosure
CAM (robustness Investor perception of
(working Brown et al. Mechanical Turk” on perceived auditor
check) misbehavior of auditor
paper) and 116 law students misbehavior
(private investors)
Decreased readability of
the audit report; decreased
2017
Carver and USA, 150 private Readability of the audit perception of management
(working CAM
Trinkle investors report information value credibility when earnings
paper)
just meet analysts’
expectations

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Problems and Perspectives in Management, Volume 17, Issue 3, 2019

Table 3 (cont.). Overview of empirical research regarding the impact of KAM and other related
information on shareholders

Year of
publication/ KAM and
State, sample,
status of Author(s) other related Dependent variable Main results
time period
working information
paper
CAM (location Receipt of a CAM paragraph
USA, 141 alumni of in a separate includes change of
Christensen Change in investment
2014 a business school paragraph or in investment decision in
et al. decision
(private investors) management’s comparison to information
footnotes) in management’s footnotes
Degree of CAM
(no, graphic,
2016 USA, 102 MBA narrative). Graphic CAM (narrative
(working Dennis et al. students (private Additional Information value CAM) is (not) linked to
paper) investors) management increased information value
disclosure in the
notes (yes/no)
Estimate disclosures are
Investor perceptions on value relevant to investment
Additional
auditor independence, decisions. Independence
2014 USA, 80 MBA comments to the
management reliability, and credibility perceptions
(working Doxey students (private audit process
reporting quality, influence perceived
paper) investors) and valuation
information value for misstatement probability,
measures
investment decisions reporting quality and
investment
Imprecise accounting
USA, 234 students Investor perception on
2016 Gimbar et al. CAM standards and CAMs lead to
(private investors) auditor liability
increased auditor liability
CAM disclosures
USA, 70 lawyers, 150
2017 decrease assessments of
Kachelmeier MBA students, and Investor perception of
(working CAM auditor responsibility if
et al. 50 financial analysts auditor responsibility
paper) misstatement fits with the
(private investors)
CAM; “disclaimer effect”
Confidence increases by
USA, 191 participants
Investor confidence in increased CAM precision
2017 from Amazon
Kipp CAM the audit and financial and by increased description
(dissertation) Mechanical Turk
statements of the related audit
(private investors)
procedures
Germany (mainly),
2016 89 professional Increased trust in the
Investors’ trust in the
(working Köhler et al. investors and 69 KAM valuation process only by
valuation process
paper) nonprofessional professional investors
investors
Degree of
CAM (e.g.,
with resolution
Risk-seeking investors are
2016 USA, private paragraph, Investment decision
Pelzer more likely to invest than
(dissertation) investors language clarifying regarding risk preference
risk-averse investors
the sufficiency of
audit evidence
obtained)
Investor judgments.
USA, 292 participants Mediator: investor
2018
from Amazon perception of CAM reduces investors’
(working Rapley et al. CAM
Mechanical Turk management’s influence investment intentions
paper)
(private investors) on financial reporting
quality
Increased access and
Information value with attention to financial
Canada, 98 students
2018 Sirois et al. CAM regard to acquisition statement disclosures; less
(private investors)
process attention by at least three
CAMs

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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

Table 3 (cont.). Overview of empirical research regarding the impact of KAM and other related
information on shareholders
Year of
publication/ KAM and
State, sample,
status of Author(s) other related Dependent variable Main results
time period
working information
paper
Higher auditor negligence
USA, 168 participants
2018 by CAM removal; highest
of “Amazon’s CAM removal and Investor perception on
(working Vinson et al. negligence by removal after
Mechanical Turk” duration auditor negligence
paper) CAM disclosures for many
(private investors)
years
Additional Judgment process
Investor perceptions on
comments to information mitigates
A. Wright and S. USA, 72 private auditor responsibility
2014 going concern auditor attribution after
Wright investors in case of a future
decision process the bankruptcy for auditor
bankruptcy
of the auditor performance measures
Archival studies (macroreactions)
2018 Investors price KAMs into
Almulla and New Zealand, 132
(working KAM Value relevance share prices, both in the first
Bradbury firms 2017
paper) and prior year
France, 1,767,
2018 1,967, 2,140, and Investor reactions
No impact on investors
(working Bédard et al. 2,407 firm-year JOA (abnormal rents and
reactions
paper) observations, trade volume)
2000–2011
UK, 1,320, 1,208,
Investor reactions
and 1,236 firm- No change of investor
2018 Gutierrez et al. RMM (abnormal rents and
year observations, reactions
trade volume)
2011–2015
2017
Investor reactions No increased informative
(working Lennox et al. UK, 488 firms, 2013 RMM
(abnormal rents) value for investors
paper)
Increased Increased abnormal trade
2015
UK, 293 firms, reporting of audit Investor reactions volume, more pronounced
(working Reid et al.
2012–2013 committees and (abnormal trade volume) by firms with weak
paper)
auditor (e.g. KAM) information environment
Audit reports are easier
to read and better reflect
Communication value
UK, 2012–2014, the risk-related nature of
2017 (working (audit report readability
Smith 700 firm-year RMM financial statement audits
paper) and tone). Earnings
observations and earnings forecast
forecast dispersion
dispersion decreases after
the regulation

2.2.2. Limitations and research questioned. Thus, research that combines exper-
recommendations imental and archival research design is necessary.
The dominance of the US-American capital mar-
Empirical research on behavioral auditing can ket in current research is problematic because of
be still classified as a niche (Simnett & Trotman, its lack of transferability to other regimes. KAM
2018), but experimental research on KAM disclo- regulations have been implemented not only in
sure has been well established recently. The inter- the USA, but in many other countries. Other set-
national dominance of archival studies on empir- tings, such as the EU, should be included in future
ical audit research with other topics is not useful research. For experiments, reliance on students
for studying KAM disclosures. Our theoretical and “Amazon’s Mechanical Turk” participants is a
framework indicates that the individual charac- very popular research strategy to measure private
teristics of investors are very important for ex- investors’ behavior. However, due to the limited
plaining the impact of KAM disclosures on value validity of this research, future researchers should
relevance. The assumption of a risk-neutral homo- directly question different investors (Köhler et al.,
geneous shareholder group in line with classical 2016; Pelzer, 2016). As the current research main-
agency theory is not realistic and thus has to be ly concentrates on private investors, inclusion of

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Problems and Perspectives in Management, Volume 17, Issue 3, 2019

more professional investors and explanation of et al. (2017) confirmed the informational value of
the main differences between private and profes- KAM disclosure with an online survey of corpo-
sional investors is necessary (Köhler et al., 2016). It rate loan officers, Boolaky and Quick (2016) did
is important to note that a variety of KAM-related not find that bank directors’ perceptions change as
accounting topics have been examined in experi- a result of KAM disclosures. Additionally, based
mental settings (e.g. goodwill impairment), which on an archival study, Porump et al. (2018) found
lowers the comparability of the results. Country- that an increased amount of RMM is connected
specific effects of the equity market and socio-eco- with less favorable loan contracting terms.
nomic environment (e.g. shareholder rights, le-
gal enforcement) should be included in future 2.3.2. Limitations and research
cross-country archival studies. recommendations

Furthermore, we encourage researchers to conduct Recent empirical KAM research on debtholders

interviews and surveys with investors or perform reactions is not valid and of low quantity unlike
case studies with investors in a specific company research on investors. As debtholders are key cor-
to gain more insight into investment decisions af- porate stakeholders, especially in small and me-
ter KAM disclosure. Linguistic analyses of KAM dium-sized entities, we encourage researchers to
disclosure are most useful to analyze decision use- include this stakeholder group in future designs.
fulness for investors. As many researchers crit- Interestingly, no experimental research has been
icize the limited transparency and readability of conducted so far. This research gap should be de-
audit reports published in recent years (Carver & creased in light of the heterogeneous preferences
Trinkle, 2017), more research on KAM readability of debtholders and their unclear reaction to KAM
and external auditors’ tone management is needed. disclosures. In line with the behavior of share-
holders, individual risk preferences may lead to in-
2.3. Debtholders creased or decreased loan contracting conditions
for a company. It is most useful to analyze the link
2.3.1. Results between KAM disclosure and debtholders’ reac-
tions using archival data. In line with our recom-
In contrast to shareholders, we identify only three mendations regarding investors’ reactions, future
studies on debtholders (Boolaky & Quick, 2016; research should conduct cross-country studies
Porump et al., 2018; Trpeska et al., 2017), which on the impact of KAM disclosure on debtholders’
have mixed results (see Table 4). While Trpeska reactions.
Table 4. Overview of empirical research regarding the impact of KAM and other related information
on debtholders

Year of
KAM and
publication/ State, sample, Dependent Main
Author(s) other related
status of time period variable results
information
working paper
Bank director
perception of financial No different perceptions
Germany, 105 bank
2016 Boolaky and Quick KAM reporting and audit by inclusion of KAM
directors
quality as well as credit disclosures
approval decisions
Lenders perceive
Loan contracting borrowers with more
UK, 561 (301) facility-
2018 features (spread, RMMs to be riskier
Porump et al. year observations RMM
(working paper) loan maturity, loan which translates into
2010–2016
ownership structure) less favorable loan
contracting terms
Macedonia, 31
Extended auditor Information on KAM
corporate loan
2017 Trpeska et al. reporting (e.g. Information value were considered of high
officers (online
KAM) importance
survey) 2016

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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

2.4. External auditors ing estimate (Asbahr & Ruhnke, 2018), the value
of information (Pelzer, 2016), audit fees (Bédard
2.4.1. Results et al., 2018; Gutierrez et al., 2018; Reid et al.,
2018) and audit report lag (Bédard et al., 2018).
We identify three experiments (Asbahr & Only Ratzinger-Sakel and Theis (2017), Almulla
Ruhnke, 2018; Pelzer, 2016; Ratzinger-Sakel & and Bradbury (2018) and Li et al. (2018) found
Theis, 2017) and five archival studies (Almulla significant auditor reactions to KAM disclo-
& Bradbury, 2018; Bédard et al., 2018; Gutierrez sure as audit fees increase (Almulla & Bradbury,
et al., 2018; Li et al., 2018; Reid et al., 2018) that 2018; Li et al., 2018) and auditors exhibit less
examine the impact of KAM disclosure on ex- skeptical judgment (Ratzinger-Sakel & Theis,
ternal auditors’ behavior (see Table 5). In most 2017). In contrast to other stakeholders, a varie-
cases, KAM disclosure did not change auditors’ ty of different regimes (Germany, the USA, New
behavior concerning their professional judg- Zealand, France, the UK) were included in this
ment of the reasonableness of a biased account- stream of research.

Table 5. Overview of empirical research regarding the impact of KAM and other related information
on auditors
Year of
publication/ KAM and
State, sample, Dependent Main
status of Author(s) other related
time period variable results
working information
paper
Experiments and interviews (individual reactions)
Professional judgment about
Critical attitude of the
Germany, 164 reasonableness of a biased
2018 Asbahr and auditor. Additional
auditors (Big Four), KAM accounting estimate is not
(dissertation) Ruhnke audit time. Moderator:
2016 affected by KAM or client
client pressure
pressure
No increased information
2016 value; misinterpretation of the
Pelzer USA, 16 auditors CAM Information value
(dissertation) shareholders and boilerplates
are possible
Auditor judgment Auditors exhibit less skeptical
performance (skeptical judgment when KAM is
2017 Ratzinger-Sakel
Germany, 73 auditors KAM judgment and action) present; more willing to
(working paper) and Theis
Moderator: client acquiesce to their clients’
pressure desired accounting treatments
Archival studies (macroreactions)
Auditors price KAMs into audit
2018 (working Almulla and New Zealand, 132 Audit effort (audit fees,
KAM fees, both in the first and prior
paper) Bradbury firms, 2017 audit delay)
year
France, 1,767, 1,967,
2018 2,140, and 2,407 firm- Audit fees. Audit report
Bédard et al. JOA No impact on audit measures
(working paper) year observations, lag
2000–2011
UK, 1,320, 1,208,
and 1,236 firm-
2018 Gutierrez et al. RMM Audit fees No change of audit fees
year observations,
2011–2015
Additional
auditor
New Zealand,
reporting
2018 121-182 firm- Increased audit fees after KAM
Li et al. requirements Audit fees
(working paper) year observations reporting
(e.g., KAM,
2016–2017
auditor partner
signature)
UK, 888-1,292 firm-
2018 Audit costs (audit fees,
Reid et al. year observations, RMM No change of audit fees
(working paper) audit delay)
2012–2013

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Problems and Perspectives in Management, Volume 17, Issue 3, 2019

2.4.2. Limitations and research management decisions, e.g. earnings management

recommendations or management reporting. According to our stake-
holder agency-theoretical framework, extended
Interestingly, the surveys and experiments direct- auditor reporting should lead to decreased infor-
ly address external auditors. However, with the ex- mation asymmetries and conflicts of interests be-
ception of Asbahr and Ruhnke’s (2018) study, the tween management, external auditor and capital
number of participants in these studies is rather market. We identify five experiments (Bentley et
low. Therefore, the validity of the studies is limit- al., 2018; Cade & Hodge, 2014; Fuller, 2015; Kang,
ed. Pelzer (2016) mentioned the risks of misinter- 2018; Klueber et al., 2018) and six archival stud-
pretation and use of boilerplate information when ies (Almulla & Bradbury, 2018; Bédard et al., 2018;
discussing KAM. Thus, we encourage future re- Brouwer et al., 2016; Gutierrez et al., 2018, Li et al.,
searchers to survey external auditors to determine 2018; Reid et al., 2018) that examine the impact of
how they actively contribute to better transparen- KAM on the board of directors (see Table 6).
cy and readability of KAM disclosures, as regu-
lators have criticized the lack of transparency of Most studies explore the impact of KAM disclo-
audit reports. As accounting topics, which lead to sure on earnings management (Klueber et al., 2018;
KAM disclosures, are often very complex for ex- Almulla & Bradbury, 2018; Bédard et al., 2018;
ternal stakeholders, the tone of explanations in Gutierrez et al., 2018; Li et al., 2018; Reid et al., 2018).
the audit report may have a major impact on the While there is evidence of a positive link between
expectation gap. Future archival research should KAM and accounting quality (Klueber et al., 2018;
analyze audit-related determinants (e.g. Big Four Almulla & Bradbury, 2018; Li et al., 2018; Reid et
audits, industry specialists, (non) audit fees, audit al., 2018), some insignificant results were also found
report lag) on KAM readability. Most recent ar- (Bédard et al., 2018; Gutierrrez et al., 2018).
chival studies used audit fees as a proxy for audit
quality (Almulla & Bradbury, 2018; Bédard et al., KAM disclosure may influence not only earnings
2018; Gutierrez et al., 2018; Li et al., 2018; Reid et management, but also management reporting and
al., 2018). We are aware that the audit fee proxy has management decisions (Bentley et al., 2018; Cade &
limited validity, because it can reflect both audit Hodge, 2014; Brouwer et al., 2016). Based on a con-
independence and audit efficiency. Non audit fees, tent analysis, Brouwer et al. (2016) stated that KAM
auditor tenure and audit partner signature can be often corresponds with accounting policies and es-
more useful for analyzing auditor independence. timates in the notes. However, risks related to the
As many countries have recently implemented management reports are not mentioned in KAM
KAM disclosure rules, learning effects of external disclosures. Mixed results are also found by Bentley
auditors will have a major impact on auditor re- et al. (2018): managers are willing to increase (de-
porting. To do so, time series analyses are recom- crease) risk increasing (decreasing) transactions.
mended. As we will describe in the next section, According to Cade and Hodge (2014), managers
cooperation between audit committees and exter- share less information with their auditor about
nal auditors should be included in future research. their accounting choices after the KAM regulations.
Also, research should analyze whether the audit
committee has a complementary or substitutional Three studies examined the role of the audit commit-
relationship with the external auditor, which may tee as a monitoring institution (Fuller, 2015; Kang,
lead to increased or decreased audit fees. 2018; Velte, 2018). While Kang (2018) stated that the
audit committee decreases their overall questioning
2.5. Board of directors behavior regarding management when KAM is dis-
closed, Fuller (2015) found that the strength of the
2.5.1. Results audit committee’s oversight moderates the positive
association between KAM disclosure and manage-
Not only share- and debtholders and external au- ment reporting. Velte (2018) is the only author in our
ditors, but also a major impact of KAM disclosure sample that analyzed the impact of audit committee
on board of directors is expected in empirical re- composition (gender diversity) on RMM readability
search. Thus, KAM disclosure are linked with and stated a positive link.

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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

Table 6. Overview of empirical research regarding the impact of KAM and other related information
on boards of directors
Year of
publication/ State, sample, KAM and other Dependent Main
Author(s)
status of time period related information variable results
working paper
Experiments (individual reactions)
CAM increases managers’
USA, willingness to risk
CAM (derivatives Chang of managers’
2018 Experienced increasing transactions,
Bentley et al. versus new loan decisions based on the risk
(working paper) corporate but decreases managers’
program) implications
managers willingness to risk
decreasing transactions
Managers are less willing
Additional comments to share information
Informational
2014 Cade and USA, University to the audit process about their accounting
communication between
(working paper) Hodge alumni and valuation choices with their
management and auditor
measures auditors. Trust can lower
this negative effect
Increased management
disclosure which could
Degree of management enhance the ability to
USA, 142 disclosure regarding CAM. quantify risks; audit
2015 CAM (short- and
Fuller financial Moderator: audit committee committee oversight
(dissertation) long-term)
executives, 2014 oversight strength strength strengthens the
(expertise) positive link between
KAM and management
reporting
In the presence of
anticipated additional
Audit committee propensity
audit report disclosure,
to ask challenging questions
USA, 81 audit audit committee
2018 about management’s
Kang committee JOA members tend to
(working paper) significant accounting
members decrease their overall
estimates. Moderator:
questioning behavior
investor sophistication
(driven by financial
experts)
Earnings management
Germany, 54
Earnings management. decreases with increased
2018 financial
Klueber et al. KAM Moderator: informational information precision; no
(working paper) statement
precision significant results by low
preparers, 2016
informational precision
Archival studies und content analyses (macroreactions)
2018 Almulla and New Zealand, Accounting quality (accruals) Positive impact on
KAM
(working paper) Bradbury 132 firms, 2017 disclosure accounting quality
France, 1,767,
1,967, 2,140, and
2018 No impact on accounting
Bédard et al. 2,407 firm-year JOA Accounting quality (accruals)
(working paper) quality
observations,
2000–2011
KAM often correspond
with the significant
The Netherlands, accounting policies
50 management and estimates they are
Brouwer reports, financial Correspondence of KAM reported in the notes;
2016 KAM
et al. statements and with the financial statement but the risks in the
audit reports, management report
2015 are on average not
mentioned in the KAM
disclosures
UK, 1,320,
1,208, and
Gutierrez
2018 1,236 firm-year RMM Accounting quality (accruals) No change of accruals
et al.
observations,
2011–2015

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Problems and Perspectives in Management, Volume 17, Issue 3, 2019

Table 6 (cont.). Overview of empirical research regarding the impact of KAM and other related
information on boards of directors
Year of
publication/
State, sample, KAM and other Dependent Main
status of Author(s)
time period related information variable results
working
paper
New Zealand, Additional auditor
Decrease in abnormal
2018 121-182 firm-year reporting requirements
Li et al. Accounting quality (accruals) accruals after the
(working paper) observations, (e.g., KAM, auditor
regulation
2016–2017 partner signature)
UK, 888-1,292 Accounting quality (accruals, Increased accounting
2018 firm-year meet or beat analyst quality by decreased
Reid et al. RMM
(working paper) observations, forecasts, earnings response accruals and beat analyst
2012–2013 coefficient) forecasts)
Positive impact of
Gender diversity in the RMM readability (Flesch
2018* Velte UK, 2014–2015 gender diversity on KAM
audit committee reading ease)
readability

Note: * Study that analyzes possible determinants of KAM disclosure.

2.5.2. Limitations and research relevant to analyze the impact of audit commit-
recommendations tee composition (e.g. members with financial ex-
pertise or industry expertise) on KAM disclosure,
With one exception (Klueber et al., 2018), the ex- as the audit committee and external auditor must
periments were performed only in a US-American discuss the audit focal points, which can be rele-
setting. We already stated that the empirical re- vant for the external auditor’s choice of KAM to
sults are not transferable to other regimes. From disclose in the audit report (Velte, 2018).
an international perspective, one- and two-tier
systems of corporate governance are very different Most earnings management studies, based on ar-
in terms of composition and to KAM disclosure. chival data, use accruals measures. In line with
In addition, the US-American one-tier system many critics of such measures in former literature
(e.g. by Bentley et al., 2018) is not comparable to (Gaynor et al., 2016), we stress the limited validity
the German two-tier system (Klueber et al., 2018). of accruals. To increase the sensitivity of archival
This is mainly important in relation to the role of research, future researchers should include other
audit committees in one-tier and two-tier systems. accounting quality variables, such as restatements,
Audit committees in one-tier systems tend to have meeting or beating analysts’ earnings forecasts
increased information access, but can have de- and accounting conservatism. Accruals measures
creased independence in comparison to commit- only pertain to book-related accounting policies.
tees in two-tier systems. For this reason, research During recent years, archival research on other ac-
on two-tier systems is recommended. counting, auditing or corporate governance issues
has integrated real earnings management (Gaynor
Few earnings management studies based on ex- et al., 2016). This kind of extension can be very
periments have been conducted to date (Klueber useful in empirical KAM research, too. As earn-
et al., 2018). We identify a research gap with re- ings management is dependent on country effects
gard to empirical qualitative research (surveys, (e.g. code versus case law, the strength of legal en-
interviews, case studies) on the impact of KAM forcement), we encourage researchers to conduct
disclosure on the reactions of boards of directors. cross-country studies in the future.
Both management and audit committees should
be addressed in future research to gain more in- 2.6. Other stakeholders
formation about the cooperation process between
the audit committee and external auditor and the 2.6.1. Results
correspondence between management reporting
(e.g. in the notes or management report) and the Similar to the results of debtholders, we know very
KAM disclosure of the external auditor. It is also little about the impact of KAM disclosure on oth-

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 Problems and Perspectives in Management, Volume 17, Issue 3, 2019

Table 7. Overview of empirical research regarding the impact of KAM and other related information
on other stakeholders
KAM and
State, sample, time Dependent Main
Year Author(s) other related
period variable results
information
Worldwide, 138
Information value and Increased information
stakeholder comments to
2017 Prasad and Chand KAM audit quality perceived value. No impact on
the IAASB reform project
by stakeholders audit quality
(content analysis)
Worldwide, stakeholder Higher information
comments to the IAASB Information value for value in Europe and
2014 Simnett and Huggins KAM
reform project (content stakeholders South Africa in contrast
analysis) to North America
Denmark, 25 firms, Information value for Increased information
2016 Sneller et al. KAM
2013–2015 stakeholders value
Worldwide, 139
stakeholder comments to Information value for Increased information
2018 Tiron-Tudor et al. KAM
the IAASB reform project stakeholders value
(content analysis)

er stakeholders (e.g. customers, suppliers, employ-

should conduct interviews, surveys and case
studies on other stakeholders’ perceptions of
ees, the state). In our sample, four studies address
a broad range of stakeholders (Prasad & Chand, KAM (e.g. customers’ awareness, suppliers’ at-
traction, employee relationships). Furthermore,
2017; Simnett & Huggins, 2014; Sneller et al., 2017;
empirical quantitative research on other stake-
Tiron-Tudor et al., 2018) without any explicit theo-
retical framework (see Table 7). Prasad and Chandholders should be both experimental and archi-
(2017), Simnett and Huggins (2014) and Tiron- val nature. The variety of regulations on KAM
Tudor et al. (2018) used stakeholders’ comments disclosure implemented in recent years are not
on the IAASB reform project in content analyses limited to share- and debtholders, external au-
and found an increased informational value for ditors, and boards of directors. Thus, increasing
stakeholders. A content analysis of annual and au-
trust of other stakeholders is an important goal
dit reports performed by Sneller et al. (2017) al-
for future research. PIEs are confronted with
so had the same results. Additionally, no impact increased regulations concerning not only fi-
on audit quality was found by Prasad and Chand nancial accounting, auditing and corporate gov-
(2017). ernance, but also non-financial reporting (e.g.
Corporate Social Responsibility (CSR) reporting
2.6.2. Limitations and research or integrated reporting). As non-financial re-
recommendations porting and CSR assurance can be classified as
key topics in research, regulation and practice,
Not only the amount of studies on the impact of the interdependencies between KAM disclosure,
KAM disclosures on other stakeholders, but also integrated reporting and non-financial issues
the focus on qualitative research (content anal- should be addressed from a broader stakeholder
yses) lowers their relevance. Future researchers perspective in future research.

SUMMARY
Capital market trust in financial reporting and external audit quality has decreased after the financial
crisis of 2008–2009. Information overload in annual reports and audit reports is linked with decreased
decision usefulness for shareholders and other stakeholders. As a result, auditor reporting (e.g. KAM
disclosures) have been extended by various institutions (e.g. FRC, 2013; IAASB, 2015; PCAOB, 2017).
Regulators assume KAM disclosures are linked with lower information asymmetry and expectation gap
and thus increase financial reporting and audit quality.

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Problems and Perspectives in Management, Volume 17, Issue 3, 2019

In contrast to former literature reviews on extended auditor reporting (Gimbar et al., 2016; Bédard et
al., 2016), we rely on 49 empirical studies on KAM disclosure and conduct a stakeholder-oriented struc-
tured literature review. We identified five major streams of empirical research that analyze the impact
of KAM disclosure on stakeholders’ reactions: those focusing on (1) shareholders (e.g. investors’ percep-
tions of auditors’ responsibility and litigation, value relevance and investors’ decisions); (2) debtholders
(e.g. loan contracting terms); (3) external auditors (e.g. audit processes and audit fees); (4) boards of di-
rectors (e.g. earnings management); and (5) other stakeholders (e.g. informational value for suppliers
and customers). Most of the included studies use experimental or archival data and analyze the impact
of KAM disclosure on investor reactions in a US-American setting. However, the intended goal of KAM
regulations is still controversial, as evidenced by the mixed empirical results. Although there are some
indications of decreased earnings management behavior, most studies find no significant changes in
auditor behavior. Furthermore, there are many insignificant results with regard to shareholders’ reac-
tion in line with our stakeholder and behavioral agency framework. In order to increase the validity of
empirical KAM research, we recommend a variety of research topics for the five streams of research. In
particular, cross-country studies are needed due to the international regulation of KAM during recent
years. Interestingly, behavioral research on auditing has been established within the field of empirical
KAM research, but not related to other audit topics. We see a major need to include a mixture of research
methods to explain the impact of KAM disclosure on stakeholders’ reactions. As stakeholders’ preferenc-
es are heterogeneous and many stakeholder groups have limited knowledge and experience with KAM
disclosure, external auditors should provide a transparent and readable audit report without any boiler-
plate information. Otherwise, KAM regulations result in opposite stakeholder reactions (e.g. increased
expectation gap and decreased stakeholder trust in financial accounting and external audits). Thus, our
results are not only relevant for future research but also for regulators and practice. Future developments
in KAM regulation (e.g. increased precision of audit reporting standards, possible extension of compa-
nies) have to be critically discussed in light of the limited evidence regarding increased accounting and
audit quality. The results of our literature review are especially relevant for the board of directors and top
management decisions. Recent empirical research on KAM disclosure indicates that KAM disclosure
may have an impact on earnings management and management reporting behavior (e.g. risk reporting).
Furthermore, the audit committee as a monitoring institution of the board of directors is linked to au-
ditor cooperation and KAM disclosure. KAM disclosure and external audit in total should be classified
as a major challenge to increase stakeholder trust after the financial crisis. Thus, management should be
aware of the price competition and supplier concentration on the audit market. Perceived audit quality
may be low if the audit committee does not grant enough resources and fees for the external auditors.

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