The impact of US critical audit matter disclosure on firms' credit ratings

Purpose
This paper examines the informativeness of US critical audit matter (CAM) disclosure to credit rating agencies (CRAs) as sophisticated beneficiaries of audited financial statements. It investigates the impact of CAM disclosure – mandated by the Public Company Accounting Oversight Board (PCAOB) to highlight high-risk areas – on firms' credit ratings.

Design/methodology/approach
We conduct multivariate analysis of CAM effects on a firm's credit rating through ologit regressions (credit rating analysis), logit models (investment versus speculative-grade analysis), intertemporal (within-firm) change analyses and quasi-experimental difference-in-differences specifications. We conduct our tests using a sample of US companies that adopt CAM disclosures and employ both a control group of nonadopters and a propensity score-matched group of economically comparable nonadopters. Main tests use S&P long-term issuer credit ratings, with additional robustness checks utilizing Fitch ratings.

Findings
After controlling for firm characteristics and corporate governance attributes, we document that CAM disclosure negatively affects firms' credit ratings. Our results are robust to endogeneity concerns and various estimation procedures, providing novel evidence that the new requirement of CAM disclosure is associated with significant consequences for preparers and users of financial reports, particularly regarding credit rating assessments.

Practical implications
The evidence-based insights from this study demonstrate that CAM disclosures have significant implications for credit risk assessments, making them relevant to auditors, preparers and users of financial reports, policymakers and regulatory bodies, specifically the PCAOB, Financial Reporting Council (FRC) and International Auditing and Assurance Standard Board (IAASB).

Originality/value
This research advances the literature on expanded audit reports by providing the first empirical evidence that CAM disclosures are informative to CRAs, bridging the gap between studies focused on market reactions and those on experimental assessments of audit information. It highlights the direct impact of CAM disclosures on credit ratings, supporting the usefulness of expanded auditor reporting for sophisticated users of financial statements.