Effects of Critical Audit Matter (CAM) Industry Norm and Auditor—CEO Social Tie on Nonprofessional Investors’ Financial Reporting Risk Assessments

ABSTRACT In this study, we experimentally examine the effects of the critical audit matter (CAM) industry norm and auditor‐CEO social tie on investors’ financial reporting risk (FRR) assessments. Using online participants, we find that non‐professional investors assess the lowest FRR when the CAM is consistent with the industry norm and the auditor‐CEO social tie is absent than when the CAM is inconsistent with the industry norm or when the auditor‐CEO social tie is present. Our findings also suggest that the presence of social tie negatively affects investors’ investment interests, lowers their perceptions toward audit quality and the auditor, and increases auditor liability for a CAM‐related misstatement. Moreover, we find that a norm‐consistent CAM leads to better investment decisions, higher reliance on audit reports, but also higher perceived management liability for a CAM‐related misstatement. The findings of our study can be informative to management and auditors, as well as regulators.