What is in a word? The information value of key audit matters

Abstract

This study aims to investigate whether key audit matters (KAM) in audit reports in South Africa are linguistically homogeneous. If homogenous, then the reports are of limited information value and probably boilerplate. Design/methodology/approach – Linguistic tone and correspondence analysis (CA) were used to evaluate KAM’s information value and provide a visual representation of the differences, between the practices of audit firms, within industries and at client companies over time. Information value was determined by interpreting linguistic (tone) differences using Shannon (1948)’s Information theory as a theoretical lens. Findings – Overall, the KAM of most client companies, and industries analysed, were found to have information value and are not boilerplate, suggesting that industry-level boilerplating does not occur as argued in prior research. However, most audit firms tend to have a distinctive KAM tone profile or signature, indicating that boilerplate KAM templates are used within audit firms. Lastly, analysis of specific client companies over time indicates that some companies use boilerplate KAM from one year to the next, diminishing the information value of the KAM section of the audit report. Originality/value – This study’s contribution primarily lies in the approach used to evaluate KAM information value, through tone and CA, which is not based on a similarity score like prior studies. Our approach allows us to consider relative associations between firm-year observations and tone categories as an indicator of homogeneity at audit firm level, within industries and for specific client companies over time. The study focuses on South African data, which contributes to the literature on audit reporting practices in developing economies.