Corporate risk disclosure and key audit matters: the egocentric theory

Elmarzouky, Mahmoud; Hussainey, Khaled; Abdelfattah, Tarek; Karim, Atm Enayet

Abstract

Purpose: This paper aims to provide unique interdisciplinary research evidence between the risk information disclosed by auditors and the risk information disclosed by corporate managers. In particular, it investigates the association between the level of risk information disclosed by auditors (key audit matters [KAMs]) and the level of corporate narrative risk disclosure. Design/methodology/approach: The study sample consists of the UK FTSE all-share non-financial firms across six financial years. The authors use a computer-aided textual analysis, and the authors use a bag of words to score the sample annual reports. Findings: The results suggest that KAMs and corporate narrative risk disclosure levels vary across the industries. The authors found a significant positive association between the risk information disclosed by auditors and the risk information disclosed by corporate managers. Also, the authors found that FTSE 100 firms exhibit higher significance between the ongoing concern and the level of narrative risk disclosure. Practical implications: The study approach helps assess the level of management risk reporting behaviour due to the new auditor risk reporting standards. This helps to emphasise how auditors and companies engage and communicate risk-related information to stakeholders. Standard setters should suggest a more detailed reporting framework to protect the shareholders. The unique findings are incredibly beneficial to the regulators, standard setters, investors, creditors, suppliers, customers, decision makers and academics. Originality/value: This paper provides a shred of extraordinary evidence of the impact of auditor risk reporting and management risk reporting. To the best of the authors’ knowledge, no study has yet investigated the corporate narrative disclosure after the new audit standards ISA 700 and ISA 701.

Citation

Elmarzouky, M., Hussainey, K., Abdelfattah, T., & Karim, A. E. (2022). Corporate risk disclosure and key audit matters: the egocentric theory. International Journal of Accounting and Information Management, 30(2), 230-251. https://doi.org/10.1108/IJAIM-10-2021-0213

• Journal Article Type: Article
• Acceptance Date: Feb 4, 2022
• Online Publication Date: Mar 15, 2022
• Publication Date: Apr 15, 2022
• Deposit Date: Nov 14, 2022
• Publicly Available Date: Nov 18, 2022
• Journal: International Journal of Accounting and Information Management
• Print ISSN: 1834-7649
• Electronic ISSN: 1758-9037
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• Volume: 30
• Issue: 2
• Pages: 230-251
• DOI: https://doi.org/10.1108/IJAIM-10-2021-0213
• Keywords: Key Audit Matters, risk disclosure; textual analysis; UK
• Public URL: https://nottingham-repository.worktribe.com/output/13740957
• Publisher URL: https://www.emerald.com/insight/content/doi/10.1108/IJAIM-10-2021-0213/full/html