Research On The Impact Of Key Audit Matter Disclosure On Consolidated Goodwill And Its Economic Consequences

Driven by global M&A activity,goodwill has become an increasingly important asset on the balance sheets of public companies.As of February 2020,the total goodwill of listed companies worldwide amounted to $8 trillion.Domestically,according to the CSMAR database,as of 2019,the total M&A transactions of listed companies in China exceeded 2.28 trillion yuan,and the percentage of A-share listed companies with goodwill grew from 29.21%in 2007 to 65.89%in 2019,with total goodwill of 1.63 trillion yuan.The huge increase in goodwill reflects the unreasonable valuation of enterprise mergers and acquisitions and the inflated consideration of mergers and acquisitions,which not only leads to a large number of "bubbles" and"unreal" components in the consolidated goodwill assets of listed companies,but also lays the groundwork for subsequent goodwill impairment.This has not only led to a large number of "bubbles" and "unreal" components in the consolidated goodwill assets of listed companies,but also laid potential dangers for subsequent goodwill impairment,which seriously affects the stability of our capital market.In the context of the current economic stability,how to alleviate the huge amount of consolidated goodwill caused by overpayments in mergers and acquisitions and to promote the full and timely recognition of goodwill impairment losses by listed companies is the key to ensuring the quality of financial reports of listed companies and is essential to reducing information asymmetry and resolving financial risks in the capital market is of great significance.Independent audit is an important institutional arrangement to ensure the quality of accounting information,and is extremely important to reduce information asymmetry in the capital market and improve the efficiency of resource allocation.However,for a long time,the traditional "three-stage" audit report is too simple and provides limited information to meet the decision-making needs of information users.On December 23,2016,the Ministry of Finance of China issued 12 auditing standards,including "PRC CPA Auditing Standard No.1504-Communicating Critical Matters in the Audit Report"(hereinafter referred to as "new auditing standards")."New Auditing Reporting Standards")and implemented on a pilot basis for A+H share companies from January 1,2017.As the most significant reform in the audit field in recent decades,the New Auditing Standards seek to enhance the transparency of the audit process by increasing the disclosure of Critical Audit Matters("CAM")in the audit report on financial statements,in order to improve the information content of the audit report and audit quality.In this context,whether the disclosure of CAM information in the audit report(hereinafter referred to as "CAM disclosure requirement")will influence the auditor’s behavior and the listed company’s business activities and financial reporting behavior,and improve the quality of consolidated goodwill accounting information,has become a focus of attention of the capital market regulators and the society.Based on th is,this dissertation proposes a research in the context of the research background and the current status of research through the logic of "(CAM disclosure requirements→quality of information on consolidated goodwill at M&A level(excess goodwill)/quality of information on consolidated goodwill at financial statement level(timeliness of goodwill impairment))→ ability of consolidated goodwill to predict future cash flows/risk of stock price collapse".The problem is presented.The specific research ideas are as follows:First,CAM disclosure requirements may increase the probability that excess goodwill resulting from mergers and acquisitions will be disclosed as a CAM event in the annual audit,prompt auditors to improve the audit quality of M&A transactions,reduce the information asymmetry between the merger consideration and the merger goodwill valuation process,prompt managers to abandon irrational M&A behavior and proactively increase their attention to the valuation of merger goodwill,and thus influence the excess goodwill of enterprises.Second,focus on large goodwill.Second,we focus on the issue of timeliness of subsequent goodwill impairment arising from large amounts of goodwill,and investigate the impact of CAM disclosure requirements on the timeliness of goodwill impairment of listed companies.Finally,we focus on whether the improved quality of listed companies’ consolidated goodwill assets brought about by CAM disclosure requirements can improve the situation of difficulty in predicting enterprises’ future cash flows and impair the efficiency of capital market resource allocation caused by the low quality of accounting information on consolidated goodwill in the past.After empirical testing of the empirical data,the full-text conclusions are obtained,and on this basis,policy implications and research limitations are summarized,while possible future research directions are outlined.The main findings of this dissertation are as follows:(1)CAM disclosure requirements significantly inhibited excess goodwill in the treatment group compared to control group firms.The results of the mechanism test indicate that the CAM disclosure requirement reduces the valuation bias and surplus management motive in the fair value estimation process of managers’ merger goodwill by alleviating the information asymmetry between the two sides of the merger and the recognition process of merger goodwill,which in turn inhibits the formation of excess goodwill.(2)Currently,the problem of untimeliness of goodwill impairment is prevalent among listed companies in China;the CAM disclosure requirement significantly improves the timeliness of goodwill impairment for companies in the treatment group compared to companies in the control group.Using goodwill impairment CAM disclosure as a characterization of high goodwill impairment audit quality,it is found that this enhancement effect is mainly concentrated in companies that disclose goodwill impairment CAM after the implementation of the standard,and is not significant in companies that do not disclose goodwill impairment CAM.This suggests that the improved effect of CAM disclosure requirements on the timeliness of goodwill impairment is mainly due to increased auditor audit input and improved audit quality,rather than the timely recognition of goodwill impairment by pre-audit managers;this improved effect is concentrated in listed companies with a more favorable regional legal environment and stronger incentives for surplus management.(3)The improvement in the quality of consolidated goodwill information by CAM disclosure requirements significantly improves the ability of listed companies’consolidated goodwill information to predict future cash flows.This indicates that CAM disclosure requirements help eliminate bubbles in listed companies’consolidated goodwill assets,increase the substantive information contained in consolidated goodwill,and improve the ability of consolidated goodwill to predict future cash flows;further study finds that higher information asymmetry and greater audit investment(higher audit fees and longer audit delays)help improve the ability of consolidated goodwill information to predict firms’ future cash flows;moreover,the more adequate the goodwill CAM disclosure is,the more significantly it improves the ability of listed companies’ consolidated goodwill information to predict future cash flows.(4)The improvement in the quality of consolidated goodwill information by CAM disclosure requirements can effectively curb the risk of share price collapse of listed companies.This indicates that CAM disclosure requirements help to eliminate the disincentive for management to hide negative information and expand investors’reliable information sources about goodwill,thus effectively mitigating the occurrence of extremely negative stock price collapse risk;further study finds that the higher the degree of information asymmetry and the greater the audit investment(higher audit costs and longer audit delays),the more it helps to enhance the improvement of consolidated goodwill information on corporate collapse risk.In addition,when goodwill CAM information is disclosed more adequately,the more significantly it enhances the suppression of the risk of future stock price collapse of listed companies by consolidated goodwill information.In summary,the theoretical analysis and empirical study of the paper confirm that the CAM disclosure requirement significantly improves the quality of accounting information related to the initial recognition and subsequent measurement of consolidated goodwill of listed companies in China,and this improvement improves the ability of consolidated goodwill to predict future cash flows and inhibits the risk of future stock price collapse.The dissertation hopes to contribute to the existing literature as follows.First,focusing on the quality of information on the initial recognition and subsequent measurement of goodwill,the study contributes to the rich theoretical literature on CAM disclosure requirements,responding to DeFond and Zhang’s(2014)call to recognize audit reporting reforms and the value they bring.The literature has examined the usefulness of CAM disclosures for investor decision making,as well as the impact on independent audit behavior,and managerial decision making.However,these studies have not yet reached consistent conclusions.Limited by the diversity of what CAM disclosures are and how they map to financial reporting quality,studies using overall financial reporting quality have struggled to make direct inferences about the impact CAM disclosure requirements have on surplus quality.This dissertation helps deepen the direct evidence on the spillover effects of CAM disclosure requirements on financial reporting quality by focusing on specific accounts,namely goodwill and goodwill impairment.Second,existing literature based on European and American markets examines the opportunistic behavior of managers in the accounting treatment of consolidated goodwill,and domestic scholars have begun to focus on the economic consequential nature of large amounts of goodwill in financial statements,but little literature provides direct empirical evidence of the impact of CAM disclosure requirements on the quality of information on the initial recognition and subsequent measurement of consolidated goodwill based on emerging economies,and this dissertation’s research helps to enrich the consolidated goodwill This study helps to enrich the relevant theoretical literature and also provides reference for the development of long-standing and controversial standards related to the subsequent accounting treatment of goodwill.Finally,in light of the deepening impact of China’s audit report reform on the operational decisions of listed companies and the quality of financial reports,this dissertation examines the economic consequences of CAM disclosure requirements on consolidated goodwill from the perspective of the ability of consolidated goodwill to predict future cash flows of enterprises,which will help enrich the research on cash flow forecasting.From the perspective of capital market stability,the economic consequences of the impact of CAM disclosure requirements on consolidated goodwill are explored,which provides a useful supplement to the research on the factors influencing the risk of stock price collapse.