AJIBM  Vol.10 No.2 , February 2020
Informational Value in Critical Audit Matters—Evidence from Institutional Investors in Shanghai Stock Market
Abstract: A newly released audit principle required all public companies to include critical audit matters (Cam) in financial reports, whose features and informational value was empirically studied in this paper. Results showed that, current Cams are quantitatively small, accurately and specifically poor and they mostly come in statements rather than in forms, and institutional investors withdrew more investment as the number and accuracy of cams went up. Further studies showed that the informational value of Cams was more significant in companies with high informational asymmetry and companies audited by relatively less professional audit firms (neither international big 4 nor national big 10 audit firms).
Cite this paper: Li, X. (2020) Informational Value in Critical Audit Matters—Evidence from Institutional Investors in Shanghai Stock Market. American Journal of Industrial and Business Management, 10, 286-304. doi: 10.4236/ajibm.2020.102018.

[1]   Amihud, Y., Mendelson, H., & Pedersen, L. H. (2002). Market Liquidity: Illiquidity and Stock Returns: Cross-Section and Time-Series Effects. Journal of Financial Markets, 5, 31-56.

[2]   Christensen, B. E., Glover, S. M., & Wolfe, C. J. (2014). Do Critical Audit Matter Paragraphs in the Audit Report Change Nonprofessional Investors’ Decision to Invest? Auditing: A Journal of Practice & Theory, 33, 71-93.

[3]   Flint, D. (1988). Philosophy and Principles of Auditing: An Introduction. New York: Macmillan Education Ltd.

[4]   Grinblatt, M., Sheridan, T., & Russ, W. (1995). Momentum Investment Strategy, Portfolio Performance and Herding: A Study of Mutual Fund Behavior. American Economic Review, 85, 1088-1105.

[5]   Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque Financial Reports. R2, and Crash Risk. Journal of Financial Economics, 94, 67-86.

[6]   IAASB (2011). Enhancing the Value of Auditor Reporting: Exploring Options for Change.

[7]   Jensen, M. C., & Meckling, W. (1976). Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure. Journal of Financial Economics, 3, 305-360.

[8]   Kachelmeier, S. J., & Valentine, J. J. K. (2017). Schmidt and The Disclaimer Effect of Disclosing Critical Audit Matters in The Auditor’s Report.

[9]   Kohler, A., Ratzinger-Sakel, N. V. S., & Theis, J. (2016). The Effects of Critical Audit Matters on The Auditor’s Report’s Communicative Value: Experimental Evidence from Investment Professionals and Non-Professional Investors.

[10]   Lennox, C. S., Schmidt, J. J., & Thompson, A. (2017). Is the Expanded Model of Audit Reporting Converging to Investors? Evidence from the UK.

[11]   Li, L., Yan, B., & Gu, C. X. (2014). Intellectual Property Protection, Informational Asymmetry and Capital Structure of High-Tech Enterprises. Management World, No. 11, 1-9.

[12]   Lu, J., & Zhang J. D. (2018). Preliminary Study on Critical Audit Disclosure in Audit Report—Evidence from A+ h-Share Listed Companies. Accounting Research, No. 2, 83-89.

[13]   Mellers, B., Schwartz, A., Ho, K., & Ritov, I. (1997). Decision Affect Theory: Emotional Reactions to the Outcomes of Risk Options. Psychological Science, 8, 423-429.

[14]   PCAOB (2013). Proposed Auditing Standards: The Auditor’s Report on an Audit of Financial Statements.

[15]   Shepperd, J., & McNulty, J. (2002). The Affective Consequences of Expected and Unexpected Outcomes. Psychological Science, 13, 85-88.

[16]   Sherer, M., & Kent, D. (1988). Auditing and Accountability. London: Paul Chapman Publishing Ltd.

[17]   Song, Y., Shen, J., & Fan, M. H. (2012). Do the Geographical Characteristics of Listed Companies Affect the Shareholding Decisions of Institutional Investors?—Empirical Evidence from China’s Securities Market. Accounting Research, 2020, 72-79+97.

[18]   Wang, Y. Y., Xu, R., Wang, C. L. et al. (2018). Can the Critical Audit Matters Section Improve the Informational Value of the Audit Report? Accounting Research, No. 6, 86-93.

[19]   Wermers, R. (1999). Mutual Fund Trading and the Impact on Stock Price. Journal of Finance, 54, 581-622.

[20]   Zhang, J. X., Cai, Y. D., & Liu, W. H. (2016). Improvement of Standard Audit Report, Relationship between Management and Auditors and Communication Intention of Management—An Experimental Evidence. Audit Research, No. 3, 77-83.