Disclosure of Key Audit Matters Regarding Market Response

Abstract

This study examines the impact of Key Audit Matters (KAMs) disclosure on the market response of companies listed on the LQ-45 index in Indonesia. The research covers the initial three-year period (2022-2024) following the mandatory implementation of KAMs reporting in December 2022. Market response was measured using Average Abnormal Trading Volume (ABVOL) and Cumulative Abnormal Return (CAR). KAMs disclosure was evaluated through content analysis based on SA 701, focusing on five key attributes: the number of KAMs, the reason for disclosure, readability, specificity, and uniqueness. Data from LQ-45 companies were analyzed using regression in STATA 17. Most tested KAMs attributes showed no significant influence. However, one specific reason for disclosure positively affected trading volume (ABVOL), while longer KAMs descriptions negatively impacted returns (CAR). This suggests detailed information can increase investor activity, but lengthy text may be perceived as a "bad news signal," prompting a negative reaction. The limited significance of most KAMs attributes indicates that Indonesian investors are still adapting to this new reporting standard. The findings suggest the market prioritizes information quality over linguistic simplicity in auditor communications. This research provides timely empirical evidence on the early-stage effects of mandatory KAMs disclosure in an emerging market like Indonesia, highlighting the nuanced and evolving nature of market interpretation.