The purpose of this study is to examine the relationship between Silent critical audit matters (CAMs) and corporate financial misconduct. Auditing Standard 3101 (AS 3101) mandates US auditors to disclose CAMs in audit reports, thereby enhancing transparency regarding material and high-risk accounts. However, in accordance with AS 3101, auditors have the discretion to declare the absence of identified CAMs, termed “Silent CAMs” herein. These reports are labeled as such because they essentially remain “silent” on CAMs, offering no additional information. We direct our focus toward Silent CAMs due to the limited research available on them, and their implications remain uncertain.
Utilizing data from US public companies spanning 2019–2021, we assess corporate financial misconduct with Benford Score (Amiram et al., 2015) and address endogeneity concerns through robustness tests employing entropy balancing, extended postpandemic sample period and propensity score matching.
The analyses reveal a significant positive association between Silent CAMs and a client firm’s likelihood of engaging in corporate financial misconduct, particularly evident in cases of prolonged audit firm tenure. Although a large portion of Silent CAMs were issued by non-Big 4 auditors, the relationship between Silent CAMs and corporate financial misconduct is consistent across all firms.
This research sheds light on the inherent risks associated with an auditor’s assertion of no CAMs and answers the call for further research on CAMs (Klevak et al., 2023). It provides financial statement users with valuable insights into risks potentially overlooked by auditors. Furthermore, it draws regulators’ attention to the issuance of Silent CAMs in their reviews of audits, providing an additional investigation criterion. Moreover, this study contributes to the literature by underscoring a potential drawback of extended auditor tenure.
