The Role of Key Audit Matters Readability in Mitigating Greenwashing in Emerging Markets
Introduction
Sustainability reporting has become a focal point for firms seeking legitimacy in the eyes of stakeholders. However, in emerging markets such as Indonesia and Malaysia, high levels of information asymmetry and concentrated ownership structures create incentives for corporate greenwashing, whereby firms exaggerate or misrepresent environmental claims (Asfiansyah & Tjahjadi, 2026). Traditional audit reports have been criticized for their limited communicative value, often failing to disclose material risks and professional judgments effectively (Arikan, 2022; Asare & Wright, 2012).
To address these concerns, international auditing standards introduced Key Audit Matters (KAMs) disclosure under ISA 701. KAMs aim to enhance the informative value of audit reports by highlighting high-risk areas, significant estimates, and auditors professional judgments (Gambetta et al., 2023; Haider et al., 2025).
Research Objective
This study investigates whether the readability of KAMs—how clearly audit information is presented—can serve as an effective governance mechanism to curb greenwashing in publicly listed non-financial firms in Indonesia and Malaysia from 2020 to 2024 (Asfiansyah & Tjahjadi, 2026). The study addresses the following questions:
- Does KAM readability reduce greenwashing practices?
- How does the institutional environment (Indonesia vs. Malaysia) affect this relationship?
Methodology
- Sample: 5720 firm-year observations of non-financial public firms on the Indonesia Stock Exchange and Bursa Malaysia, after excluding financial institutions and firms with incomplete data (Asfiansyah & Tjahjadi, 2026).
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Independent Variable: KAM readability, measured by:
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KAM_NUMB: Number of KAMs disclosed. -
WORDS: Total words in KAM sections. -
SPECIFICATION: Level of firm-specific details.
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- Dependent Variable: Greenwashing index, defined as the discrepancy between environmental disclosures (Bloomberg ESG scores) and actual environmental performance (Refinitiv ESG scores).
- Controls: Firm characteristics (size, leverage, ROA, etc.), governance variables (board size, independence, CEO duality), audit quality indicators (Big 4 affiliation, audit switching), and fixed effects for firms, industries, years, and countries.
Panel data regression models were used to examine the relationship between KAM readability and greenwashing, with robustness checks including linguistic readability indices (Flesch Reading Ease, Gunning Fog, SMOG) and lagged independent variables.
Key Findings
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Baseline Results:
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All three KAM proxies (
KAM_NUMB,WORDS,SPECIFICATION) negatively and significantly relate to greenwashing. - Higher readability and more detailed KAMs improve audit transparency and limit managerial opportunism (Asfiansyah & Tjahjadi, 2026, Tables 4 & 5).
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All three KAM proxies (
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Robustness Analysis:
- Readability effects remain consistent across alternative linguistic indices and after entropy balancing to control for covariate imbalances.
- Lagged KAM measures show similar negative associations, confirming temporal robustness.
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Institutional Differences:
- Subsample analysis indicates that the negative effect of KAM readability on greenwashing is stronger in Indonesia than Malaysia, reflecting Indonesias higher information asymmetry and weaker governance environment (Asfiansyah & Tjahjadi, 2026, Table 8).
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Mechanisms:
- Clear and communicative KAMs increase auditor scrutiny and managerial accountability, reduce the scope for impression management, and improve the credibility of sustainability reporting.
- Firms audited by Big 4 show higher baseline audit rigor, but readability independently contributes to reducing greenwashing.
Contributions
- Demonstrates that KAM readability, not merely disclosure, enhances the governance function of audit reports in emerging markets.
- Provides empirical evidence that audit communication quality can mitigate greenwashing in institutional environments with concentrated ownership and high reputational sensitivity.
- Offers methodological guidance for measuring KAM readability in multilingual contexts, such as Indonesian and English (Malaysia).
Practical Implications
- Auditors: Should emphasize clear, specific, and accessible KAM language to strengthen oversight and reduce litigation risk.
- Boards/Audit Committees: Should evaluate KAM readability as an indicator of audit quality and consistency between sustainability claims and actual operations.
- Regulators: May consider explicit guidance on KAM narrative quality to improve reporting credibility.
Limitations and Future Research
- Reliance on textual analysis may introduce measurement bias.
- Sample limited to firms with identifiable KAM sections and complete ESG data, potentially causing selection bias.
- Endogeneity concerns, such as reverse causality, cannot be fully ruled out.
Future research could use quasi-experimental designs, NLP techniques for semantic analysis, and cross-country comparisons to further examine the effectiveness of KAM readability in different institutional settings (Asfiansyah & Tjahjadi, 2026).
References
- Arikan, O. (2022). The effect of boilerplate language on nonprofessional investors judgments. Accounting and Business Research, 52(4), 417–442.
- Asare, S. K., & Wright, A. M. (2012). Investors, auditors, and lenders understanding of the message conveyed by the standard audit report on the financial statements. Accounting Horizons, 26(2), 193–217.
- Asfiansyah, A., & Tjahjadi, B. (2026). Key Audit Matters, Readability and Greenwashing Effect: An Exploration from Indonesia and Malaysia. Journal of Risk and Financial Management, 19(168). https://doi.org/10.3390/jrfm19030168
- Gambetta, S., et al. (2023). [Audit Communication Literature].
- Haider, S., et al. (2025). [KAM Effectiveness Studies].