Informational content of key audit matters and financial analysts' forecasts

Abstract

The aim of this article was to analyze the relationship between the informational content of the key audit matters (KAMs) reported in the Independent Audit Report (IAR) and financial analysts' forecasts for the companies listed on the B3 S.A. - Brasil, Bolsa, Balcao (B3). The research that has investigated the relevance of KAMs has not analyzed the incremental information about the audited firm, from the independent auditor's viewpoint, that can affect financial analysts' forecasts. The findings of this research reveal that the KAMs reported present relevant informational content about the audited firm for financial analysts, thus improving the quality of their forecasts. In addition, it was observed in the quantile analysis that the KAMs contribute to the fine tuning of analysts' forecasts. The debate on the auditor-analyst relationship is also widened, specifically regarding the utility of KAMs for financial analysts, in terms of them considering using this information in their projections for the analyzed companies, thus reinforcing the search for their improvement by the regulator. The analysis was conducted based on generalized least squares (GLS) and quantile regressions covering 137 non-financial companies, using data from (quarterly and annual) analysts' forecasts available from Thomson Reuters Eikon® and financial information from Economatica®. In general, the quantity and content of the items reported as KAMs were revealed to be significant in relation to the analysts' earnings per share forecasts and to their forecasting error, revealing a reduction in asymmetry. Thus, the higher the informational value of the KAMs, the better the quality of that information is, contributing to forming an earnings forecast consensus and minimizing the error in the financial analysts' estimates. In addition, it was observed that the disclosure of KAMs has no immediate reflection in the earnings forecast in the quarter following their disclosure, with their informational content being diluted over the following financial period, impacting the annual earnings forecast.