Insights from Japan’s Digitally Tagged KAMs: 1 – The Big Themes

Posted on June 9, 2022 by Revathy Ramanan

This is part of a short series on initial insights from our analysis of digital KAMs data being collected in Japan for the first time. Watch this space for further posts.

The Key Audit Matters (KAMs) section of an audit report highlights the most significant issues found, in the auditor’s judgement. KAMs are intended to help users better understand audits of financial statements, often indicating areas of risk that may be of interest to investors. Until now, however they have not been digitally tagged using XBRL, and have therefore been difficult to analyse.

That all changed for Japan last year,  becoming the first jurisdiction to require digital tagging of KAMs disclosures by public companies, to the best of our knowledge. There is more on the reporting requirements here (in Japanese, but your chosen digital translator is likely to do a good job). The use of XBRL makes KAMs data machine-readable and enables it to be immediately put to analytical use.

Of course, we at XBRL International wanted to know what insights could be gained from XBRL-tagged KAMs disclosures. We have carried out an initial analysis of around 5,500 KAMs observations drawn from around 2,400 annual reports for the fiscal year ending in 2021, submitted to Japan’s EDINET disclosure platform. You may find more on a deep dive into the data – so let us know your conclusions on this newly available digital resource!

In this first post, we are starting with an overview. The graphic shows a summary of broad themes across all the tagged KAMs. The size of the bubble indicates the total frequency of all KAMs falling within each category. We created these categories using text clustering analysis to group similar text descriptions, which we then named according to topic. The data comes from the tagged ‘Short description,’ a summary which we’ve found more helpful in capturing the KAMs than the full text block, helping us carry out quick textual analyses – a theme we will be returning to later in this series.

It is already clear that digitally tagged KAMs can help users understand the key risks identified by auditors, here giving us an overview across all public companies. In our next post, we will start breaking the data down by industry sector.

Securities regulators and audit regulators around the world may well find the approach taken in Japan to be worthy of their own analysis.

Please note that the data was originally in Japanese and was translated using Google Translate, so it may well contain translation errors. It is also early days for this new tagging requirement, so we can expect some data-quality issues; we understand that the Japanese Institute of Certified Public Accountants is currently working on some relevant guidance. We thank XBRL Japan for sharing the data, enabling us to set the ball rolling with this initial analysis.

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