The effect of key audit matters on the association of credit risk and earnings quality
ISSN: 0268-6902
Article publication date: 31 July 2023
Issue publication date: 9 November 2023
Abstract
Purpose
The purpose of this study is to examine whether the required disclosure and the high frequency of key audit matters (KAMs) are likely to moderate the effect of higher credit risk on earnings quality.
Design/methodology/approach
This study uses 15,106 Taiwanese firm-year observations to explore the relationship between earnings quality and credit risk during the 2011 to 2020 period. We use the two-stage least squares method to test whether the presence of KAM disclosures moderated the association between earnings quality and credit risk and also to examine whether higher KAM frequency moderates the association between earnings quality and credit risk.
Findings
Our results provide evidence that the presence of a KAM disclosure requirement moderates the impact of firms with higher credit risk on earnings quality. In addition, there is significant evidence that the higher the frequency of KAM disclosures the greater the moderation impact that is found.
Originality/value
This research investigates whether the disclosure and high frequency of KAMs moderates the effect of credit riskiness on earnings quality. This study improves our understanding of whether more KAMs disclosures would improve earnings quality of firms with higher credit risk. In addition, we also use Beneish M-SCORE, as an alternative earnings quality proxy, to reinforce our empirical results. This markedly differentiates this paper from other studies.
Keywords
Acknowledgements
Professor Picheng Lee would like to express his sincere gratitude to the Lubin School of Business at Pace University for providing him with a summer research grant.
Citation
Chiang, S., Kleinman, G. and Lee, P. (2023), "The effect of key audit matters on the association of credit risk and earnings quality", Managerial Auditing Journal, Vol. 38 No. 7, pp. 997-1023. https://doi.org/10.1108/MAJ-02-2022-3465
Publisher
:Emerald Publishing Limited
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