Lights, <scp>KAMs</scp> , Action!: Nonprofits and Key Audit Matters Disclosure Choice as a Signaling Mechanism

ABSTRACT Recent changes to American Institute of Certified Public Accountant auditing standards now allow US private and nonprofit entities to voluntarily engage their auditor to include key audit matters (KAMs) communications in their audit report. We rely on signaling theory to help assess potential benefits and drawbacks of KAMs audit report disclosure and seek to understand the potential effects of KAMs on nonprofit organizations and related stakeholder groups from the perspective of nonprofits considering whether to engage their auditor to disclose KAMs. While limited extant research primarily considers the effects of such disclosures on for‐profit entities, this research note contributes to a small, yet burgeoning literature on this timely topic by considering the effects of KAMs in the context of signaling theory on different nonprofit stakeholder groups. An important takeaway is that nonprofits should take into account their specific mix of stakeholders when considering KAMs disclosure.