Tightened it and ruined it: Earnings management trade-off as a consequence of key audit matters disclosure

Do changes in audit regulation disclosure always come with positive consequences? The paper studies the effect of expanding audit reporting by key audit matters on earnings management. Using a sample of 580 firm-year observations listed on the Omani stock market covering the period 2012–2019, the empirical results show that these new requirements make managers use more real earnings management and less use of accruals earnings management. Additional analyses provide evidence suggesting that key audit matters disclosure creates an atmosphere inducing managers to excessively substitute accruals earnings management by real earnings management. Thus, we conclude that new key audit matters requirement entails unintended negative consequences.