The effect of critical audit matters on critical accounting estimates and the consequences of two disclosures consistency

Purpose This study aims to investigate whether critical accounting estimate (CAE) disclosures by managers are affected by critical audit matter (CAM) disclosures by auditors. These two types of disclosures may overlap, as they both involve estimates and judgments with uncertainties in financial reporting. Design/methodology/approach The authors manually collect the CAEs disclosed in the 10-K and match them with CAM disclosure based on the same topic. Then, the authors empirically examine the influence of CAM on CAE tones (i.e., negative and uncertain tones) and test how financial information quality is affected when two disclosures are similar in tones. Findings The negative and uncertain tones of CAEs are more salient when auditors disclose the same topic as CAMs and when CAM also emphasizes negative and uncertain tones. CAE-CAM tone consistency helps to improve financial information quality, especially when the firm has an effective audit committee and is audited by industry specialist auditors. Originality/value It shows that improved communication between auditors and managers through CAM disclosures enables managers to better understand the sources of uncertainties embedded in the financial information processing, and thereby contribute to improve the quality of financial information.