Implications of recent reforms to auditor reporting requirements in Australia

Past corporate scams and failure to convey valuable information to financial information users have cultivated severe criticism of the audit report. The long-lasting debate culminated in introduction of the new ISA 701 and revision of some extant auditing standards to enhance the quality of audit reports while providing transparent and entity-specific information. Of all the changes to audit reporting, the disclosure of key audit matters (KAMs) in a new separate section of the audit report is one of the most significant and has attracted the most controversy. There still exists polemics among standard-setters, academics, investors, and other stakeholders regarding the merits of the new reporting requirements . Motivated by continuous debate and the lack of prior research, this study investigates the degree of conformity with the new audit or reporting requirements in Australia and the extent of variations in the reporting of KAMs by companies within and across industries. The results indicate that there is a high degree of conformity with the new reporting framework, yet significant variations in the contents of the report, particularly in KAM disclosures. We observe that the number of KAMs, the types of KAMs presented, and their extent of disclosure generally varies both within and across industries. We further provide evidence that auditors do not disclose negative KAMs, rather they tend to avoid negative wordings when describing KAMs. Overall, we provide evidence that auditors are reactive in the innovative KAM disclosure; however, we still report some discrepancies in their reporting. In addition, we reveal significant differences in the pre-and post-ISA 701 audit reports in terms of its length; therefore, disclosures contained in the post-ISA 701 audit reports are much more comprehensive. These findings have important policy implications for the standard-setters, regulators, auditors, and users of financial reports on the adequacy of the new audit or reporting framework.