The Institutional Ceremony of Key Audit Matters: A Decoupling of Disclosure from Audit Outcomes in Pakistan's Non-Financial Sector

Abstract

This research attempts to determine the extent to which the disclosure of “Key Audit Matters” (KAMs) affects the audit outcome, namely audit fee and audit delay, within the Pakistan institutional setting. The study employs Institutional Theory to test whether the mandatory adoption of KAMs, which acts as an “isomorphic pressure,” has led to significant changes in audit effort and timeliness rather than existing at a ceremonial level to preserve legitimacy. Utilizing data on non-financial listed entities with a data set of 199 non-financial entities on the Pakistan Stock Exchange over a period of six years, starting in 2018 and culminating in 2023, with a total observation of 1194 firm-years, this research applies fixed-effect panel regression analysis with clustered std. errors. Our empirical analysis reveals that there has been significant decoupling. That is, “KAM disclosures” reveal neither significant nor positive association with audit fee as well as the audit report lag, yet firm-level characteristics, size ROA, and leverage reveal significant positive association with the audit outcome measures. The findings highlight that in Pakistan’s emerging market, the adoption of KAMs may be pushed more by coercive and mimetic isomorphism to attain legitimacy rather than by a substantial enhancement in audit rigor. This endeavour contributes to the global auditing literature by underscoring the crucial role of local institutional contexts in influencing the real impact of the international auditing standards.

Keywords: Key Audit Matters, Audit Fees, Audit Report Lag, Institutional Theory, Pakistan