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A New Uncertainty Measure—Cam

Julia Klevak, Joshua Livnat, Duo (Selina) Pei and Kate Suslava
The Journal of Investing February 2021, joi.2020.1.161; DOI: https://doi.org/10.3905/joi.2020.1.161
Julia Klevak
is vice president, investment at QMA, LLC, in Newark, NJ
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Joshua Livnat
is a professor emeritus at the Stern School of Business, NYU, and senior advisor at QMA in Newark, NJ
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Duo (Selina) Pei
is a PhD student at Rutgers University in Newark, NJ
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Kate Suslava
is an assistant professor at Bucknell University in Lewisburg, PA
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Abstract

In contrast to past auditor opinions, which were largely unqualified and uniformly written, a new disclosure requirement expands auditors’ opinions to include a description of Critical Audit Matters (“CAMs”) and the audit steps necessary to form an opinion about them. The expanded disclosure provides substantially more information about the areas of financial reporting that auditors consider most uncertain. Using a comprehensive sample of initial CAM disclosures in the 10-K filings for the period of August 2019–May 2020, we find that a larger number of CAMs, a greater number of required auditing procedures, and more wordy and extensive CAM discussions are negatively associated with stock returns immediately following the 10-K filings. We also document significantly more negative analyst earnings revisions for firms whose auditors report more CAMs and provide more verbose CAM disclosures.

TOPICS: Legal/regulatory/public policy, information providers/credit ratings, financial crises and financial market history

Key Findings

  • ▪ Under the new PCAOB regulation, auditors include a description of Critical Audit Matters in the audit opinion.

  • ▪ More extensive Critical Audit Matters disclosures indicate greater uncertainty inherent in firms’ financial statements.

  • ▪ Firms with more extensive Critical Audit Matters disclosures have lower stock returns and lower analyst forecasts.

  • © 2020 Pageant Media Ltd
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The Journal of Investing: 30 (1)
The Journal of Investing
Vol. 30, Issue 1
December 2020
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A New Uncertainty Measure—Cam
Julia Klevak, Joshua Livnat, Duo (Selina) Pei, Kate Suslava
The Journal of Investing Dec 2020, joi.2020.1.161; DOI: 10.3905/joi.2020.1.161

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A New Uncertainty Measure—Cam
Julia Klevak, Joshua Livnat, Duo (Selina) Pei, Kate Suslava
The Journal of Investing Dec 2020, joi.2020.1.161; DOI: 10.3905/joi.2020.1.161
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