Corporate risk disclosure and key audit matters: the egocentric theory

Purpose - The paper provides 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 (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. We use a computer-aided textual analysis, and we use a bag of words to score our sample annual reports.

Findings - The results suggest that Key Audit Matters (KAMs) and corporate narrative risk disclosure levels vary across the industries. We found a significant positive association between the risk information disclosed by auditors and the risk information disclosed by corporate managers. Also, we 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. Our 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.