Key audit matters disclosure: do they reveal construction firm’s risk of financial distress? Evidence from Ethiopia

Abstract

Recent studies have provided insights into key audit matters (KAMs) disclosure content and their determinants. While conducting this study, no known study examined the relation between the type of KAMs reported and the level of clients’ financial distress (FIDT) risk in Ethiopia, which is a clear research gap. Hence, this study aimed to examine the disclosure of KAMs’ (in number and nature) usefulness in assessing a client construction firm’s FIDT risk. A quantitative method with five-year (2017–2022) secondary data of KAMs disclosure in the audited financial reports of grade one construction companies in Ethiopia was used to study the relationship. The pooled OLS regression analysis shows that KAMs reported by auditors are valuable in predicting and assessing a firm’s risk of FIDT. The number of KAMs and all account-specific KAMs were useful in assessing firms’ FIDT. However, from the company-wide KAMs, going concern was found to be significant. Results were found robust to FIDT, using alternative measures, and tests of endogeneity. Overall, this study suggests construction firms contemplate auditor disclosers (KAMs) as one of the financial health assessment approaches.