Key audit matters (KAM) are a primary communication channel between the auditor and financial statement users, so understanding the determinants of KAM disclosure is important. This study investigates whether and how country-specific differences explain variation in KAM disclosure.
We analyze 29,103 KAMs across 12,038 firm-year observations from 30 European countries for the fiscal years 2017 to 2022. The European setting offers an ideal research environment with uniform KAM regulation and simultaneously broad institutional diversity. To address the issue of interdependencies among country-specific variables, we apply principal component analysis to examine a comprehensive set of 33 country attributes, which reduces to three economic factors, three regulatory factors, one audit market-related factor, and one sociological factor.
We find that the country factors significantly determine KAM disclosure. Compared to the base model—incorporating auditor and firm characteristics as well as industry and year fixed effects—adding the economic, regulatory, audit market-related, and sociological country factors increases the explained proportion of the variation in the number of disclosed KAMs by around eight percentage points, corresponding to a relative increase of 36%. Factors capturing general economic development and a stringent regulatory environment are positively associated with the number of reported KAMs, while we observe a negative relationship for factors related to wealth and sociological attributes. Additionally, various aspects of KAM reporting, including the number, types, and writing style of disclosed KAMs, are differently associated with our country factors. Despite notable differences in magnitude, the variation of all examined KAM disclosure measures can be explained to a significant extent by the country factors. Our findings demonstrate that country attributes are key determinants of KAM reporting and should be accounted for in KAM studies considering a multi-country setting.
This study contributes to the auditing literature by conducting cross-country research on the determinants of KAM reporting, focusing on a broad European sample and a comprehensive set of country attributes. In particular, we extend the sparse literature focusing on cross-country differences by examining their overall relevance using a substantial number of country-specific attributes covering various dimensions. The exploratory evidence over the six years following the mandatory Europe-wide implementation in 2017, as well as additional analyses considering the pre- and post-COVID-19 periods and the disclosure of new KAMs, suggest that our findings are persistent. Thus, we contribute to a broader understanding of how (unified) audit regulations are applied in different jurisdictions.
Our insights are relevant for shareholders, users of financial statements and audit reports, regulators, and future research. Users of financial statements need to be aware of the underlying factors influencing KAM disclosure to make informed decisions. Moreover, our study supports regulators in understanding country-specific differences in the implementation of expanded audit report regulations. Finally, it opens up promising avenues for further research to advance our knowledge of KAMs.
The article ‘Do Country Differences Matter? Key Audit Matter Disclosure and the Role of Country Attributes’ by Florian Philipp Federsel and Sven Hörner (both University of Bayreuth, Germany) is forthcoming in the European Accounting Review: https://doi.org/10.1080/09638180.2025.2500442.
