Did Critical Audit Matter Dry Runs Influence Management’s Accounting Behavior?

Regulators encouraged auditors, management, and audit committees to participate in critical audit matter (CAM) reporting ‘dry runs’ to simulate the determination, disclosure, and communication of CAMs in the years preceding the standard’s effective date. This study investigates whether CAM dry runs resulted in changes in management’s accounting decisions before the CAM reporting effective date. I find that when management and auditors jointly identify an accounting topic as “critical,” CAM dry runs are positively associated with conservative accounting practices in accounts related to the dry run. Specifically, CAM dry runs are associated with a higher likelihood of goodwill impairment, less aggressive revenue recognition, increases in uncertain tax benefit reserves, and higher effective tax rates. The effect of CAM dry runs is strongest in large-accelerated filers and in those firms where the threat of investor scrutiny is higher, both signals that greater external scrutiny prompted a response to CAM dry runs. Conversely, for managements’ critical accounting estimates not designated as a firm’s inaugural CAM, dry runs are associated with aggressive accounting behavior. My findings suggest that the impact of CAM reporting on management’s behavior preceded the CAM effective date, and that the new standard uniquely affected firms where management and their auditor jointly consider accounting topics ‘critical’. This evidence helps close the expectation gap between the impact to management behavior regulators anticipated CAM reporting would bring, and the marginal effects post-implementation analyses reveal.

Grantor dc:publisher

University of Kansas

Year dc:date.issued

2025

Author dc:creator

• Robinson, Ryan W.

Advisor dc:contributor.advisor

• Li, Chan

• Accounting

Statement dc:rights

• This item is protected by copyright and unless otherwise specified the copyright of this thesis/dissertation is held by the author.

Language dc:language.iso

en

Dc Identifier Other

https://www.proquest.com/LegacyDocView/DISSNUM/31934479

OAI identifier oai:identifier

oai:kuscholarworks.ku.edu:1808/38150