# The Impact of Expanded Audit Reports in Hong Kong and China Key audit matters show limited effect on market reactions and audit quality. - **Source:** [Contemporary Accounting Research](https://onlinelibrary.wiley.com/journal/19113846) - **Published:** 2026-08-07 - **Topic:** [Finance](https://brifing.si/c/finance) - **Original article:** - **On Brifing:** https://brifing.si/s/61cfee6e-de4c-4303-a640-c482e4775bbe ## Transition to Expanded Audit Reports Hong Kong adopted expanded audit reports in 2016, followed by China in 2017, aligning with IAASB standards. These reports include key audit matters (KAMs), detailing significant risks in the audit process. The goal was to enhance investor transparency and audit quality. However, differences in investor protection and legal enforcement between the two regions remain notable. ## Market Reactions and Audit Quality The study found no compelling evidence that expanded audit reports influenced market reactions or audit quality. Analyses using company fixed effects showed KAMs did not meet investors' demand for incremental information. This highlights a gap between regulatory intent and implementation, suggesting KAMs may not be as effective as intended. ## Impact of KAM Characteristics A higher number of KAMs and novel or transaction-specific KAMs were associated with stronger pricing of fundamentals, indicating investors perceived these financial statements as better vetted. However, these KAMs also correlated with lower profitability persistence, reflecting higher company risk and volatility. ## Role of Industry-Common KAMs Industry-common KAMs appeared less relevant for valuation, as investors tended to discount routine disclosures. Yet, these KAMs were linked to more persistent performance, likely due to stable industry conditions. This underscores the importance of KAM content in shaping investor perceptions. ## Investor Perception and Risk Novel KAMs signaled company risk and volatility, influencing investor decisions. While investors valued these disclosures, they also associated them with reduced profitability persistence. This duality suggests KAMs can have nuanced effects on market behavior. ## Limitations of Regulatory Framework The study concluded that mandating expanded audit reports alone offers limited value. However, better-tailored KAM disclosures could still signal firm fundamentals and future performance. Regulators may need to refine KAM formats to enhance their usefulness. ## Implementation Challenges Audit reports in Hong Kong and China fell short of fully addressing investor needs. Differences in legal systems and investor protection levels limited KAM effectiveness, highlighting the need for localized adaptations of global audit standards. ## Recommendations for the Future The research advocates for more specific and informative KAMs. Disclosures that better reflect company risks and industry dynamics could offer greater value to investors. Regulators should review KAM formats and provide guidance to improve audit quality. ## Sources covering this story - https://onlinelibrary.wiley.com/doi/10.1111/1911-3846.70072?af=R — --- _Summary written by Brifing from the original reporting. Copyright in the original article belongs to its publisher; read the full piece at the link above._