No. 123: Auditing Effects of Acquired Intangibles around CAM Disclosures

Abstract

A vital debate amongst regulators, academics, and practitioners concerns the separation of acquired intangible assets from goodwill. We add to this debate by investigating the association between audit fees and a large US-sample of hand-collected net values of acquired intangible asset classes with indefinite and definite economic lifetimes. First, our results show that acquired intangibles, in general and especially with indefinite lifetimes, are associated with higher audit fees. Second, acquired intangibles remain less expensive than goodwill. Our core findings are consistent with the idea that auditors use the public disclosure of intangible-related critical audit matters (CAMs) to mitigate their potential litigation risks from acquired intangible assets that allows them to reduce audit fees. We establish these findings by using intangible-related CAM disclosures as an identification strategy in a difference-in-differences design. Overall, our findings inform the debate regarding the risk-reducing effects of CAM disclosures and the audit effects of acquired intangibles.