Key Audit Matters, Readability and Greenwashing Effect: An Exploration from Indonesia and Malaysia

Abstract

Greenwashing has become a critical concern in corporate sustainability reporting, particularly in emerging markets characterized by high information asymmetry. This study examines whether the readability of Key Audit Matters (KAMs) disclosures serves as an effective governance mechanism in mitigating corporate greenwashing. Using a sample of non-financial listed firms in Indonesia and Malaysia from 2020 to 2024, comprising 5720 firm-year observations, we employ panel data regression analysis to investigate the relationship between KAM readability and greenwashing practices. The findings indicate that higher KAM readability is significantly associated with lower levels of greenwashing, suggesting that clearer audit communication enhances transparency and strengthens external monitoring. These results highlight the importance of communicative and accessible KAM disclosures beyond formal compliance. The study contributes to the literature on audit reporting and sustainability governance by demonstrating the role of audit disclosure quality in improving the credibility of sustainability reporting in emerging markets. Practical implications are relevant for regulators, auditors, and firms seeking to enhance reporting integrity and reduce opportunistic sustainability disclosure.

1. Introduction

Traditional audit report formats have limited auditors’ ability to communicate material risks and areas of professional judgment to investors, often resulting in information being perceived as boilerplate and lacking relevance for economic decision-making (Arikan, 2022; Asare & Wright, 2012; Mock et al., 2013). Several studies have shown that investors perceive conventional audit reports as falling short of their expectations in disclosing company-specific risks and critical issues faced by auditors (Gray et al., 2011; Czerney et al., 2019; Gutierrez et al., 2018). To enhance the informative value of audit reports, international regulators have introduced expanded audit report formats that include Key Audit Matters (KAMs), designed to highlight high-risk areas, significant estimates, and auditors’ professional judgments (Zeng et al., 2021; Nguyen & Kend, 2021; Kitiwong & Sarapaivanich, 2020; Kend & Nguyen, 2022; Sulaiman et al., 2025; Haider et al., 2025). The relevance of KAM disclosures is particularly important in emerging markets such as Indonesia and Malaysia, where sustainability reporting practices have grown rapidly alongside increasing regulatory and stakeholder pressure, yet concerns regarding greenwashing remain prevalent due to relatively high levels of information asymmetry and heterogeneous governance structures. Public firms in these countries often exhibit concentrated ownership, varying governance quality, and evolving sustainability disclosure standards, which may create incentives for impression management in ESG reporting. In such institutional contexts, the informative value of KAMs depends not only on the substance of disclosed issues but also on the clarity and readability of audit communication (Gambetta et al., 2023; Rahaman et al., 2023; Haider et al., 2025). Therefore, this study examines whether the readability of KAMs plays an important role in improving auditor communication effectiveness by reducing corporate greenwashing practices.

The primary motivation for this study is the uncertainty surrounding empirical findings regarding the effectiveness of key audit matters (KAMs) disclosure in enhancing the informative value of audit reports (Gambetta et al., 2023; Gold et al., 2020; Pinto & Morais, 2019; Kitiwong & Sarapaivanich, 2020; Rahaman et al., 2023). Several previous studies have evaluated whether disclosure of Justification of Assessments (JOA) (Agoglia et al., 2003; Bédard et al., 2019), Risk of Material Misstatement (RMM) (Zhang & Shailer, 2021; Blay et al., 2007), and Critical/Key Audit Matters (CAM/KAM) (Zeng et al., 2021; Nguyen & Kend, 2021; Kitiwong & Sarapaivanich, 2020) can improve information quality and influence the responses of financial statement users. However, the results obtained from prior studies still show mixed and inconclusive evidence. Some studies find that expanded audit reports provide informative signals to investors and help them understand company risks and the auditor’s professional judgment (Asare & Wright, 2012; Lennox et al., 2023; Holt & DeZoort, 2009; Christensen et al., 2016). Conversely, other studies indicate that KAM disclosure tends to be symbolic, difficult to understand, or does not produce significant changes in investor perceptions and decisions (Sulaiman et al., 2025; Al Qahtani et al., 2025). This inconsistency in findings indicates that the usefulness of KAM is determined not only by its presence but also by the characteristics of its presentation. One characteristic that has received relatively little attention in the literature is the readability of KAM. Without adequate readability, KAM information can potentially fail to fulfill its communicative function, thus limiting its usefulness as a governance mechanism (Haider et al., 2025; Rajabalizadeh & Schadewitz, 2025). Therefore, this study seeks to expand the literature by examining the role of KAM readability as a determining factor in the effectiveness of audit disclosure, particularly in suppressing corporate greenwashing practices.

Second, existing empirical evidence is largely based on different market conditions and institutional environments. Most prior study focuses on developed markets, such as the United Kingdom, the United States, and Western European countries, which are characterized by high levels of investor protection (Elmarzouky et al., 2024; Zeng et al., 2021; Nguyen & Kend, 2021; Kitiwong & Sarapaivanich, 2020), mature capital market infrastructure, and relatively well-established governance and audit practices (Sierra-García et al., 2019; Elmarzouky et al., 2023; Pinto & Morais, 2019). Meanwhile, the study from developing country contexts is limited and generally concentrated on large emerging markets such as China (Marquis & Raynard, 2015; Rottig, 2016; Wright et al., 2005). This study extends the literature by examining the role of key audit matters readability in different institutional environments: Indonesia and Malaysia, which are classified as advanced emerging markets. Both countries have unique institutional characteristics, including high levels of concentrated ownership, a significant role of controlling shareholders, and organizational cultures that tend to prioritize social harmony and avoid open conflict (Rowter, 2016; Singh & Yusof, 2005). In these contexts, corporate communication practices, including sustainability disclosures are more susceptible to impression management and greenwashing. Therefore, Indonesia and Malaysia provide relevant empirical laboratories to test whether key audit matters readability can strengthen auditors’ monitoring function and limit greenwashing behavior in environments with relatively high levels of information asymmetry and institutional pressures.

To answer this research question, we manually collected audit reports from non-financial public companies in Indonesia and Malaysia during the 2020–2024 period by carefully examining the key audit matters (KAMs) section of each audit report. We measure the readability of KAM using text-based readability indicators to capture the extent to which audit information is presented clearly and easily understood by financial statement users. Furthermore, the level of corporate greenwashing is measured by the gap between disclosed sustainability claims and the company’s actual environmental performance from two different database, including Bloomberg and Thompson Reuters. We then examine the relationship between KAM readability and greenwashing behavior using a panel data regression model, controlling for firm characteristics and governance. This study demonstrates that KAM readability significantly reduces the level of corporate greenwashing. This finding indicates that KAM presented in clearer and more communicative language can strengthen the auditor’s monitoring function and limit management’s opportunity to engage in impression management regarding sustainability reporting. In the context of Indonesia and Malaysia, which are characterized by concentrated ownership and high reputational sensitivity, the use of unclear audit language has the potential to weaken the role of KAM and actually create information ambiguity. In contrast, easy-to-read KAMs increase managerial accountability and the credibility of sustainability disclosures, thereby contributing to a decrease in greenwashing practices in advanced emerging markets.

This study makes three main contributions to the sustainability auditing and reporting literature. First, by considering the institutional and cultural context of Indonesia and Malaysia as advanced emerging markets, this study expands the empirical evidence on the role of key audit matters not only as formal audit disclosures but also as a monitoring mechanism capable of curbing greenwashing practices. These findings provide a new perspective that complements evidence from developed markets and enriches understanding of the effectiveness of KAMs in non-Western contexts. Second, this study contributes to the literature by highlighting the importance of language readability in the auditor’s report as a key determinant of the informative value of KAMs. By focusing on readability, this study demonstrates that the substance of audit disclosures needs to be accompanied by communicative language presentation to be effective in reducing opportunistic management behavior. Third, this study introduces an approach to measuring the readability of KAMs in bilingual and multilingual contexts, specifically Indonesian and English (Malaysia), which can serve as a methodological reference for future research in assessing the quality of audit communication and its implications for sustainability accountability across jurisdictions.

The remainder of the paper is organized as follows. Section 2 summarizes the related literature and explains our hypotheses development. Section 3 describes the research design, sample selection, and data collection, while Section 4 reports the results. Finally, Section 5 presents the conclusion, discussion, limitations, and suggestions for future studies.

2. Literature Review and Hypothesis Development

2.1. The Informative Value of Key Audit Matters

The adoption of key audit matters (KAMs) disclosure represents a significant shift in the communicative function of the audit report (Gambetta et al., 2023; Rahaman et al., 2023; Wang & Wang, 2025), moving away from a binary opinion toward conveying more nuanced information about the audit process and focus (Rahaman et al., 2023; Sulaiman et al., 2025; Hussin et al., 2023). Through ISA 701, international auditing standards explicitly require auditors to disclose the issues that, based on their professional judgment, warrant the most significant attention during the audit. KAMs are selected from topics intensively discussed between the auditor and those charged with governance, reflecting areas of high audit risk, reliance on estimates and managerial judgment, and significant transactions or events that affect the quality of the current period’s financial statements (Elmarzouky et al., 2023; Gambetta et al., 2023; Haider et al., 2025; Kitiwong & Sarapaivanich, 2020). Unlike traditional, generic audit reports, KAMs require auditors to explicitly explain the reasons for the significance of each issue and the audit approach used to address it (Lennox et al., 2023; Pinto & Morais, 2019; Sierra-García et al., 2019). This obligation inherently increases the level of auditor scrutiny, as more detailed disclosures potentially increase the auditor’s reputational exposure and litigation risk if the audit quality is questioned. In this perspective, KAMs serve not only as an informational tool for investors but also as a disciplinary mechanism that encourages auditors to conduct more in-depth and careful audits. In line with similar developments in various jurisdictions, such as the JOA in France, the RMM in the UK, and the CAM in the United States, the KAM reflects global regulators’ efforts to strengthen audit transparency and narrow the information gap between auditors, management, and capital market stakeholders (Gambetta et al., 2023; Haider et al., 2025; Abdullatif et al., 2025; Sulaiman et al., 2025; Al Lawati & Hussainey, 2022).

Disclosure of key audit matters is seen as a crucial tool for enhancing the quality of information in audit reports by enriching the context perceived by users of financial statements (Elmarzouky et al., 2024; Gold et al., 2020; Haider et al., 2025). The informative value of an audit report arises when the information conveyed reduces user uncertainty and is relevant to the risk assessment and performance of the company. Within this framework, KAMs serve to focus users’ attention on audit areas that require the most complex professional judgment and have material implications for the financial statements. By explicitly disclosing these issues, KAMs help users understand the primary sources of risk and uncertainty facing the company and provide assurance that these critical areas have been the primary focus of audit procedures (Lennox et al., 2023; Pinto & Morais, 2019; Rahaman et al., 2023). Furthermore, KAMs enhance transparency by opening the “black box” of the audit process regarding how auditors and management exercise professional judgment in dealing with significant estimates, assumptions, and transactions (Abdullatif et al., 2025; Sulaiman et al., 2025; Al Lawati & Hussainey, 2022). This transparency not only enhances user understanding but also has the potential to enhance managerial discipline and auditor accountability, as the decisions and judgments made become more visible and readily evaluable by the market.

2.2. Auditor Scrutiny and Greenwashing Effect

Increased auditor scrutiny is one of the primary consequences of key audit matters (KAM) disclosure in modern audit reports. The auditor’s obligation to identify, explain, and communicate the most significant audit areas increases the visibility of the audit process and the auditor’s professional exposure to public judgment (Sulaiman et al., 2025; Haider et al., 2025; Zeng et al., 2021). This encourages auditors to perform more in-depth, skeptical, and well-documented audit procedures, particularly in areas involving managerial estimates and reputational risk. Therefore, KAMs serve not only as a communication tool to financial statement users but also as a disciplinary mechanism that reinforces auditors’ prudence in evaluating potentially misleading claims and disclosures.

In the context of sustainability reporting, increased auditor scrutiny becomes increasingly relevant given the heightened risk of greenwashing, the practice of companies presenting sustainability claims that are exaggerated, selective, or inconsistent with actual environmental performance (Chan & Liu, 2023; Hope et al., 2023; Bepari et al., 2024; Soeprajitno et al., 2023). Greenwashing often manifests itself through ambiguous qualitative narratives, the use of normative terms that are difficult to verify, and disclosures that emphasize the symbolism of compliance over the substance of performance. As auditors face pressure to disclose KAMs more transparently, the space for management to engage in impression management through sustainability narratives becomes more limited. Auditors who are aware that their professional judgment will be made public tend to be more critical of inconsistencies between sustainability claims and the business risks reflected in the financial statements.

Furthermore, strong auditor oversight has the potential to reduce greenwashing through two main mechanisms. First, directly, auditors can challenge management assumptions, estimates, and disclosures that are not supported by sufficient evidence, particularly when sustainability issues have financial implications or material risks (Sulaiman et al., 2025; Haider et al., 2025). Second, indirectly, market expectations for audit transparency create reputational pressure on management to align sustainability claims with actual operational practices. In institutional environments with relatively high levels of information asymmetry, such as advanced emerging markets, the auditor’s oversight role becomes even more crucial in curbing opportunistic behavior. Therefore, increased auditor scrutiny through KAM disclosures is expected to contribute to reducing greenwashing practices and strengthening the credibility of corporate sustainability reporting.

2.3. Hypothesis Development

Companies engaging in greenwashing generally face a tension between efforts to establish sustainability legitimacy and the reality of operational risks and actual environmental performance (Free et al., 2025; Mihaylova & Blumer, 2025). This mismatch between sustainability claims and actual practices increases information risk for auditors, particularly when ESG disclosures are dominated by ambiguous and difficult-to-verify qualitative narratives (Birindelli et al., 2024; Free et al., 2025; Mihaylova & Blumer, 2025). In such situations, auditors have a stronger incentive to increase their level of professional scrutiny to protect their reputations and mitigate litigation risks. KAMs disclosures are one of the primary channels through which this increased auditor scrutiny is reflected, as auditors are required to communicate areas that require significant judgment and pose a risk of material misstatement (Sulaiman et al., 2025; Haider et al., 2025; Adam et al., 2025). However, the effectiveness of KAMs in curbing management opportunistic behavior depends heavily on the extent to which the information is understandable to financial statement users. KAMs that are overly technical and complex in structure have the potential to undermine auditors’ monitoring function by reducing stakeholders’ ability to assess the consistency between disclosed risks and the company’s sustainability claims. Conversely, more readable KAMs increase the visibility of risks and audit considerations, thereby increasing external pressure on management to align sustainability narratives with actual performance. Therefore, the readability of KAM is expected to play an important role in reducing greenwashing practices by increasing the effectiveness of auditor oversight.

From a theoretical perspective, agency theory (Jensen & Meckling, 1976) provides a strong foundation for explaining how the quality of audit information can mitigate conflicts of interest between management and shareholders. Under conditions of high information asymmetry, management has an incentive to strategically frame sustainability narratives to gain legitimacy and a positive reputation, even if underlying operational practices are not necessarily aligned (Crossley et al., 2021; Hahn et al., 2014). Greenwashing, in this context, represents a form of opportunistic disclosure that magnifies information risks and challenges external monitoring (Hu et al., 2023; Yin & Yang, 2024; Hao et al., 2025; Cahyono et al., 2023). Disclosure of KAMs has the potential to mitigate these issues by increasing transparency over risk areas and the auditor’s professional judgment. However, the oversight value of KAMs depends heavily on the legibility of the language used. Difficult-to-understand KAMs limit the ability of investors and other stakeholders to assess the consistency between disclosed audit risks and the company’s sustainability claims, thereby weakening market discipline mechanisms. Conversely, clearly and communicatively presented KAMs reduce the scope for management to maintain misleading sustainability narratives, as relevant risks and uncertainties become easier to identify and evaluate. Within this framework, the legibility of KAMs not only reflects the quality of auditor communication but also strengthens the effectiveness of audit oversight as a governance mechanism. Therefore, the higher the readability of KAM, the greater the potential for reducing corporate greenwashing practices through reducing information asymmetry and increasing managerial accountability.

Conceptually, auditors’ involvement in assessing sustainability risks adds a new dimension of audit complexity, particularly when ESG disclosures are narrative, non-standardized, and fraught with subjective judgment (Czinkota et al., 2014; Sulaiman et al., 2025; Haider et al., 2025). Broad and optimistic sustainability claims can create a gray area in audit judgments, as the financial implications of environmental and social risks are often not readily reflected in conventional accounting numbers. In this context, auditors face greater professional pressure to ensure that the sustainability narrative does not mislead users of financial statements. Disclosure of KAMs provides an important tool for auditors to highlight areas of uncertainty and significant risks related to a company’s sustainability practices and claims. However, the presence of KAMs alone may not be sufficient to curb greenwashing if the information is presented in complex and difficult-to-understand language. Conversely, more readable KAMs enhance the ability of external stakeholders to evaluate the extent to which disclosed risks are consistent with the company’s sustainability claims. With increased visibility and understandability of audit risks, management faces stronger reputational pressures and market scrutiny, reducing the incentive to engage in greenwashing. Therefore, in the context of increasing complexity of sustainability reporting, the readability of KAM is expected to strengthen the effectiveness of auditor oversight and play an important role in curbing corporate greenwashing practices.

Therefore, we propose the hypothesis as follows.

Hypothesis 1.

The readability of key audit matters (KAM) negatively association with the level of corporate greenwashing.

3. Research Methodology

3.1. Data Source and Sample Selection

In line with the implementation of ISA 701 regarding the disclosure of Key Audit Matters (KAM), this study focuses on publicly listed firms in Indonesia and Malaysia during the period 2020–2024, ensuring consistency in regulatory enforcement and data availability. The initial sample comprised all publicly listed companies on the Indonesia Stock Exchange and Bursa Malaysia with independently audited annual reports. To ensure comparability and relevance, only audit reports containing a clearly identifiable KAM section consistent with ISA 701 were included in the analysis. Given the substantively different regulatory frameworks, reporting characteristics, and business models of financial institutions, firms operating in banking, insurance, and other financial sectors were excluded. Furthermore, observations with incomplete data for key variables, including KAM readability measures and the greenwashing proxy, were removed. The final sample consisted of 5720 firm-year observations as reported in

Table 1. Sample Selection.

Sample Criteria	Firm-Year Observations
initial sample included all non-financial public companies listed on the Indonesia Stock Exchange and Bursa Malaysia	6412
excluded companies operating in the banking, insurance, and other financial institutions industries	(402)
incomplete data for the study’s key variables	(290)
Final observations	5720

. Audit report data and KAM disclosures were manually collected from company annual reports and processed using a structured textual analysis approach to measure readability. Financial and firm-level data were obtained from commercial databases and publicly available annual reports. To reduce the influence of extreme values, continuous variables were winsorized at the 1st and 99th percentiles. Although ISA 701 standardizes KAM disclosure, variations in reporting format, language, and disclosure practices across firms and jurisdictions may introduce measurement bias. Additionally, the exclusion of observations with missing textual or ESG-related information may result in a sample biased toward firms with higher disclosure transparency. These limitations are acknowledged when interpreting the empirical results.

3.2. Definition of Key Variables

3.2.1. Greenwashing Effect

The literature proposes several measures of greenwashing, reflecting the evolving nature of this research field (Bernini et al., 2024; Hu et al., 2023; Yu et al., 2025). Following Yu et al. (2025), we employ a relative greenwashing measure that captures the discrepancy between environmental disclosure and actual environmental performance. Conceptually, greenwashing arises when firms present extensive environmental disclosures without corresponding performance improvements; therefore, we measure greenwashing as the normalized Bloomberg Environmental Disclosure Score minus the normalized Refinitiv Environmental Performance Score. This approach aligns with legitimacy and impression management perspectives, as it captures the gap between symbolic communication and substantive outcomes. Bloomberg and Refinitiv ESG databases provide standardized and internationally comparable metrics and have broad coverage of publicly listed firms, including major companies in Indonesia and Malaysia. While coverage tends to be stronger for larger firms with higher disclosure levels, these databases are widely used in ESG research and provide consistent cross-country comparability.

3.2.2. Key Audit Matters

The independent variable is Key Audit Matters (KAM), measured using three indicators: KAM_NUMB, WORDS, and SPECIFICATION. KAM_NUMB represents the number of critical audit matters disclosed in the auditor’s report. WORDS is measured as the total number of words contained in the KAM section, capturing the extent of narrative elaboration provided by auditors. SPECIFICATION reflects the level of entity-specific detail, measured by the proportion of firm-specific descriptions relative to standardized or boilerplate language. While longer text does not necessarily imply higher readability, prior studies suggest that sufficiently detailed and specific explanations can enhance clarity by reducing ambiguity and improving investors’ understanding of complex audit issues (Bepari et al., 2024; Lennox et al., 2023; Zeng et al., 2021). Therefore, WORDS and SPECIFICATION are interpreted as proxies for informative readability rather than mere textual length.

3.2.3. Control Variables

Drawing from the existing literature (Purwoaji et al., 2025; Nasih et al., 2025; Cahyono et al., 2025), this study selects the following control variables, including firm size (Size), leverage ratio (Lev), return on total assets (Roa), quick ratio (Quick), proportion of accounts receivable (Rec), proportion of other receivables (Other), proportion of inventory (Inv), loss indicator (Loss), board size (Board), proportion of independent directors (Indenp), CEO duality (Dual), ownership concentration (Top1), affiliation with a Big Four accounting firm (Big4), audit switching (Auditswitch), and property, plant, and equipment (PPE) (Haider et al., 2025; Sulaiman et al., 2025; Cahyono et al., 2024; Cahyono & Ardianto, 2024; Harymawan et al., 2023). In addition, this study controls for the fixed effects of accounting firms (Accfirm), industries (Ind) and years (Year). The specific definitions of the relevant variables are presented in

Table 2. Descriptive Statistics.

	Mean	Median	Min	Max	SD	25%	75%
GREENWASHING	10.236	10.157	8.191	14.229	1.130	9.360	10.932
KAM_NUMB	2.061	2.000	0.000	5.000	1.120	1.000	3.000
WORDS	6.658	5.940	0.000	16.970	3.794	4.170	8.720
SPECIFICATION	1.077	0.347	0.000	69.351	4.070	0.172	0.718
BSIZE	8.334	8.000	4.000	15.000	2.446	7.000	10.000
DUAL	0.225	0.000	0.000	1.000	0.345	0.000	1.000
INDP	0.017	0.000	0.000	1.000	0.129	0.000	0.000
BIG4	0.493	0.000	0.000	1.000	0.500	0.000	1.000
FSIZE	18.841	18.655	14.907	23.553	1.679	17.621	19.824
ROA	3.196	3.460	−38.640	30.730	10.027	−0.480	7.980
TOP1	2.152	0.983	0.001	76.119	5.373	0.560	1.786
REC	0.046	0.014	−0.746	2.142	0.359	−0.125	0.148
OTHER	−0.393	−0.216	−21.333	18.273	3.720	−0.754	0.136
LEV	0.407	0.398	0.038	0.950	0.203	0.246	0.554
QUICK	0.261	0.240	0.003	0.779	0.176	0.113	0.371
LOSS	0.278	0.000	0.000	1.000	0.448	0.000	1.000
AUDITSWITCH	0.630	1.000	0.000	1.000	0.483	0.000	1.000
INV	0.142	0.103	0.000	0.810	0.130	0.048	0.198
PPE	17.221	17.089	10.810	22.473	2.103	15.917	18.498

.

3.2.4. Model Specification

Referring to the existing studies (Haider et al., 2025; Sulaiman et al., 2025), we construct the following regression model:

$$GREENWASHING=KAM\_NUMB+SPECIFICATION+WORDS+\sum Controls+\sum Accfirm+\sum Ind+\sum Year+\epsilon$$

To improve the robustness of the regression results, we cluster the standard errors of each statistic in the model at the firm level. This paper focuses on the coefficient of γ1, which represents the kind of relationship between KAMs’ tone and audit opinions. All variable definition and measurement refers to Appendix A.

4. Empirical Result and Discussion

4.1. Descriptive Statistics

Table 2 presents descriptive statistics for all study variables, providing preliminary insights into the distributional characteristics and theoretical context of the data. The average greenwashing score is 10.236, with relatively moderate dispersion, suggesting that sustainability disclosure practices exhibit meaningful variation across firms, which is essential for testing the hypothesized relationship between audit characteristics and greenwashing behavior. The mean number of Key Audit Matters (KAM_NUMB) is 2.061, indicating that auditors typically disclose a limited number of KAMs, consistent with prior evidence that auditors tend to highlight only the most significant risk areas, thereby supporting the relevance of KAM disclosures as signals of audit scrutiny.

The readability-related variables (WORDS and SPECIFICATION) display substantial dispersion, particularly in specification levels, which exhibit strong skewness due to extreme maximum values. This suggests heterogeneity in auditors’ narrative styles and disclosure depth, reinforcing the importance of examining textual characteristics in assessing audit communication effectiveness. Governance characteristics indicate an average board size of approximately eight members; however, the relatively low mean value of board independence may reflect institutional differences in governance structures within the sample countries, which could influence monitoring effectiveness and sustainability disclosure practices. Regarding audit quality, approximately 49.3% of firms are audited by Big 4 auditors, providing sufficient variation to evaluate differences in audit rigor. Financial characteristics reveal considerable variability in profitability, including negative ROA observations, which may indicate financially distressed firms with higher incentives for impression management or greenwashing. Overall, the descriptive statistics demonstrate sufficient heterogeneity and distributional properties that align with the study’s theoretical framework and support subsequent empirical analyses.

4.2. Correlation Matrix

Table 3. Pearson Correlation.

	[1]	[2]	[3]	[4]	[5]	[6]	[7]	[8]	[9]	[10]	VIF
[1] GREENWASHING	1.000										1.22
[2] KAM_NUMB	0.762 ***	1.000									1.05
[3] WORDS	−0.058 ***	0.009	1.000								1.47
[4] SPECIFICATION	−0.020	−0.005	−0.076 ***	1.000							1.25
[5] BSIZE	−0.022	−0.006	−0.076 ***	1.000 ***	1.000						1.11
[6] DUAL	0.015	0.018	−0.180 ***	0.858 ***	0.859 ***	1.000					1.85
[7] INDP	−0.044 ***	0.006	0.027	0.392 ***	0.393 ***	0.359 ***	1.000				2.10
[8] BIG4	−0.054 ***	−0.000	0.031 *	0.382 ***	0.381 ***	0.352 ***	0.932 ***	1.000			0.78
[9] FSIZE	0.020	0.007	−0.162 ***	0.728 ***	0.727 ***	0.532 ***	0.284 ***	0.286 ***	1.000		1.11
[10] ROA	0.144 ***	0.263 ***	0.069 ***	0.007	0.006	−0.021	0.038 **	0.055 ***	0.050 ***	1.000	0.93
[11] TOP1	0.042 ***	0.101 ***	−0.002	0.099 ***	0.099 ***	0.066 ***	0.035 **	0.057 ***	0.124 ***	0.425 ***	1.22
[12] REC	0.083 ***	0.012	−0.098 ***	−0.047 ***	−0.047 ***	0.026 *	−0.023	−0.026	−0.039 ***	−0.491 ***	1.08
[13] OTHER	−0.004	−0.049 ***	0.037 ***	−0.073 ***	−0.073 ***	−0.030 **	0.019	0.025	−0.094 ***	0.038 ***	1.73
[14] LEV	−0.018	0.220 ***	0.109 ***	0.079 ***	0.080 ***	0.040 ***	0.089 ***	0.104 ***	0.067 ***	0.421 ***	1.21
[15] QUICK	0.210 ***	0.358 ***	0.078 ***	0.169 ***	0.167 ***	0.155 ***	0.084 ***	0.111 ***	0.227 ***	0.474 ***	0.57
[16] LOSS	−0.178 ***	−0.126 ***	0.207 ***	0.215 ***	0.215 ***	−0.000	0.056 ***	0.042 **	0.228 ***	0.055 ***	1.24
[17] AUDITSWITCH	−0.094 ***	−0.029 **	0.951 ***	−0.081 ***	−0.081 ***	−0.201 ***	0.024	0.026	−0.206 ***	0.046 ***	1.02
[18] INV	0.001	−0.008	−0.013	−0.131 ***	−0.129 ***	−0.160 ***	−0.178 ***	−0.190 ***	−0.087 ***	−0.001	1.20
[19] PPE	0.138 ***	0.253 ***	0.094 ***	−0.397 ***	−0.404 ***	−0.328 ***	−0.160 ***	−0.159 ***	−0.181 ***	0.322 ***	1.13
	[11]		[12]	[13]	[14]	[15]	[16]	[17]	[18]	[19]	VIF
[11] TOP1	1.000										1.22
[12] REC	0.453 ***		1.000								1.08
[13] OTHER	0.163 ***		0.177 ***	1.000							1.73
[14] LEV	0.095 ***		0.035 ***	0.260 ***	1.000						1.21
[15] QUICK	−0.005		0.011	0.187 ***	0.000	1.000					0.57
[16] LOSS	0.254 ***		0.706 ***	0.141 ***	0.071 ***	0.068 **	1.000				1.24
[17] AUDITSWITCH	−0.019		−0.030 **	0.073 ***	0.000	0.048 ***	0.051 *	1.000			1.02
[18] INV	0.159 ***		0.389 ***	−0.123 ***	0.184 ***	0.037 **	0.315 ***	−0.050 ***	1.000		1.20
[19] PPE	−0.159 ***		−0.330 ***	0.081 ***	0.035 ***	−0.004	−0.148 ***	0.007	0.034 ***	1.000	1.13

t Statistics in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01.

presents the Pearson correlation matrix between the study variables. In general, the level of greenwashing is positively and significantly correlated with the number of KAMs (KAM_NUMB), indicating that companies with higher greenwashing practices tend to face more complex audit issues. Meanwhile, the KAM readability indicator, specifically the number of words (WORDS), is negatively correlated with greenwashing, indicating that longer and relatively more informative KAMs are associated with lower levels of greenwashing. The KAM specification variable shows a weak correlation with greenwashing, but has a strong relationship with governance characteristics and company size. Several control variables, such as profitability (ROA), leverage, liquidity (QUICK), and the proportion of fixed assets (PPE), also show significant correlations with greenwashing, reflecting the link between financial condition and disclosure behavior. Overall, there is not a very high correlation between the main independent variables, so the risk of multicollinearity in subsequent regression analysis is relatively limited (VIF < 10).

4.3. Baseline Regression

Table 4. Baseline Regression.

	(1)	(2)	(3)
	GREENWASHING	GREENWASHING	GREENWASHING
KAM_NUMB	−1.468 ***
	(−2.64)
WORDS		−1.466 ***
		(−2.61)
SPECIFICATION			−2.033 ***
			(−3.56)
BSIZE	0.234 ***	0.244 ***	0.237 ***
	(7.25)	(7.54)	(7.33)
DUAL	−0.460 **	−0.457 **	−0.406 **
	(−2.34)	(−2.32)	(−2.12)
INDP	0.051	0.053	0.042
	(1.04)	(1.07)	(0.84)
BIG4	0.004 ***	0.004 ***	0.004 ***
	(3.34)	(3.56)	(3.31)
FSIZE	−0.322 ***	−0.326 ***	−0.319 ***
	(−5.26)	(−5.29)	(−5.22)
ROA	0.003	−0.009	−0.014
	(0.10)	(−0.26)	(−0.43)
TOP1	−0.021 ***	−0.020 ***	−0.027 ***
	(−4.55)	(−4.30)	(−5.63)
REC	−0.005	−0.003	−0.005
	(−0.23)	(−0.13)	(−0.22)
OTHER	0.279 ***	0.281 ***	0.285 ***
	(3.21)	(3.21)	(3.27)
LEV	0.089 ***	0.093 ***	0.104 ***
	(3.44)	(3.59)	(4.06)
QUICK	−0.001	−0.001	−0.002
	(−0.07)	(−0.10)	(−0.15)
LOSS	0.501 ***	0.493 ***	0.527 ***
	(3.09)	(3.04)	(3.26)
AUDITSWITCH	−0.005	0.003	−0.004
	(−0.05)	(0.03)	(−0.04)
INV	0.124 ***	0.133 ***	0.144 ***
	(3.82)	(3.78)	(4.12)
PPE	−0.347 ***	−0.338 ***	−0.372 ***
	(−7.28)	(−5.32)	(−5.68)
Firm Fixed Effect	Yes	Yes	Yes
Industry Fixed Effect	Yes	Yes	Yes
Year Fixed Effect	Yes	Yes	Yes
Country Fixed Effect	Yes	Yes	Yes
_cons	1.794 ***	1.762 ***	1.659 ***
	(3.84)	(3.76)	(3.54)
r2	0.256	0.255	0.259
r2_a	0.247	0.246	0.250
N	5720	5720	5720

t Statistics in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01.

presents the baseline regression results to test the effect of Key Audit Matters (KAM) on greenwashing practices. Consistent with the research hypothesis, all KAM proxies exhibit a negative and significant relationship with the level of greenwashing. Specifically, the number of KAMs (KAM_NUMB) has a significant negative effect on greenwashing, indicating that increasing audit complexity and focus can limit impression management behavior. Furthermore, the readability of KAMs, measured by the number of words (WORDS) and the level of specification (SPECIFICATION), also exhibits a negative and significant coefficient, confirming that clearer and more detailed KAMs enhance auditor oversight effectiveness. These findings support the argument that KAM readability enhances the informative value of audit reports and increases auditor scrutiny, thereby reducing the scope for greenwashing practices. Control variables show results consistent with prior literature, while all models control for firm, industry, year, and country fixed effects. Overall, these results provide strong empirical support for the research hypotheses.

These effects align with empirical literature emphasizing the role of audit communication quality in strengthening external monitoring and market discipline. Previous studies have shown that more informative audit disclosures can change managerial behavior by increasing reputational costs and scrutiny exposure (e.g., Gutierrez et al., 2018; Lennox et al., 2023). This finding is also consistent with evidence that audit transparency reduces impression management practices and symbolic disclosures in sustainability reporting. Thus, the results of this study are not only statistically significant but also have real economic implications, suggesting that improving the readability of sustainability disclosures can be an effective and relatively low-cost mechanism to curb greenwashing and enhance the credibility of sustainability information in capital markets.

4.4. Robustness Analysis

Table 5. KAM Readability.

	(1)	(2)	(3)	(4)
	GREENWASHING	GREENWASHING	GREENWASHING	GREENWASHING
FLESCH	−3.119 ***
	(−15.84)
KINCAID		−3.142 ***
		(−15.91)
FOG			−3.140 ***
			(−16.13)
SMOG				−2.072 ***
				(−11.65)
BSIZE	−1.167 ***	−1.196 ***	−1.208 ***	−0.258
	(−4.14)	(−4.22)	(−4.19)	(−0.72)
DUAL	0.007	0.007	0.005	0.001
	(0.88)	(0.89)	(0.67)	(0.10)
INDP	−14.343 ***	−14.364 ***	−12.354 ***	−2.934 ***
	(−8.24)	(−8.22)	(−7.55)	(−2.50)
BIG4	1.247 ***	1.220 ***	1.477 ***	1.271 ***
	(5.51)	(5.43)	(7.15)	(4.77)
FSIZE	−0.011	−0.011	−0.007	0.014
	(−1.23)	(−1.20)	(−0.78)	(1.15)
ROA	1.735 ***	1.797 ***	1.756 ***	2.270 ***
	(3.73)	(3.85)	(3.74)	(3.75)
TOP1	2.603 ***	2.600 ***	2.539 ***	0.213
	(7.13)	(7.01)	(7.11)	(0.65)
REC	−0.013	−0.024	0.253 ***	−0.011
	(−0.29)	(−0.56)	(5.75)	(−0.23)
OTHER	−0.103	−0.096	−0.144	0.068
	(−0.47)	(−0.44)	(−0.71)	(0.24)
LEV	−0.104	−0.163	0.160	1.013
	(−0.17)	(−0.26)	(0.27)	(1.37)
QUICK	−2.729 ***	−2.743 ***	−2.596 ***	−0.676 ***
	(−8.98)	(−8.99)	(−9.00)	(−2.70)
LOSS	0.033	0.035	0.039	0.074
	(0.54)	(0.58)	(0.66)	(0.91)
AUDITSWITCH	−7.348 ***	−7.371 ***	−7.302 ***	−7.477 ***
	(−5.94)	(−5.95)	(−5.93)	(−4.63)
INV	−2.537 ***	−2.612 ***	−2.333 ***	−3.564 ***
	(−3.27)	(−3.37)	(−3.26)	(−3.49)
PPE	−2.823 ***	−2.679 ***	−2.544 ***	−2.772 ***
	(−8.77)	(−8.72)	(−9.28)	(−2.78)
Firm Fixed Effect	Yes	Yes	Yes	Yes
Industry Fixed Effect	Yes	Yes	Yes	Yes
Year Fixed Effect	Yes	Yes	Yes	Yes
Country Fixed Effect	Yes	Yes	Yes	Yes
_cons	28.558 ***	29.082 ***	26.819 ***	34.532 ***
	(7.23)	(7.32)	(6.75)	(7.65)
r2	0.314	0.318	0.297	0.165
r2_a	0.307	0.310	0.289	0.153
N	5720	5720	5720	5720

t Statistics in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01.

presents robustness tests using four established readability measures—Flesch Reading Ease, Flesch–Kincaid Grade Level, Gunning Fog Index, and SMOG—to complement the primary readability proxies (KAM_NUMB, WORDS, and SPECIFICATION) reported in Table 4. While the baseline measures capture structural aspects of KAM disclosure, such as disclosure extent and entity-specific detail, these alternative indices focus on linguistic complexity and textual processing difficulty. The regression results show that all readability indicators have negative coefficients significant at the 1% level, indicating that more readable KAM disclosures are associated with lower levels of corporate greenwashing. The consistency of findings across structurally oriented and linguistically based readability measures suggests that the documented relationship is not driven by a specific proxy but reflects a broader informational clarity effect. Specifically, the coefficients for FLESCH, KINCAID, and FOG display relatively similar magnitudes, while SMOG, which emphasizes word complexity, yields slightly more moderate effects. Control variables remain largely consistent with the baseline models, and all specifications include firm, industry, year, and country fixed effects. Overall, these results reinforce the robustness of the baseline findings and confirm that improved KAM readability enhances audit communication effectiveness and strengthens monitoring against greenwashing.

Table 6. Entropy Balancing Approach.

	(1)	(2)	(3)
	GREENWASHING	GREENWASHING	GREENWASHING
KAM_NUMB	−1.266 ***
	(−2.62)
WORDS		−1.464 ***
		(−2.59)
SPECIFICATION			−2.031 ***
			(−3.54)
BSIZE	0.232 ***	0.242 ***	0.235 ***
	(7.23)	(7.52)	(7.31)
DUAL	−0.458 **	−0.455 **	−0.404 **
	(−2.32)	(−2.30)	(−2.10)
INDP	0.049	0.051	0.040
	(1.02)	(1.05)	(0.82)
BIG4	0.002 ***	0.002 ***	0.002 ***
	(3.32)	(3.54)	(3.29)
FSIZE	−0.320 ***	−0.324 ***	−0.317 ***
	(−5.24)	(−5.27)	(−5.20)
ROA	0.001	−0.007	−0.012
	(0.12)	(−0.24)	(−0.41)
TOP1	−0.023 ***	−0.020 ***	−0.027 ***
	(−4.57)	(−4.32)	(−5.65)
REC	−0.005	−0.003	−0.005
	(−0.25)	(−0.15)	(−0.24)
OTHER	0.281 ***	0.279 ***	0.287 ***
	(3.19)	(3.19)	(3.25)
LEV	0.087 ***	0.091 ***	0.102 ***
	(3.42)	(3.57)	(4.04)
QUICK	−0.001 **	−0.001 **	−0.001 **
	(−2.07)	(−2.10)	(−2.15)
LOSS	0.501 ***	0.493 ***	0.527 ***
	(3.09)	(3.04)	(3.26)
AUDITSWITCH	−0.003	0.002	−0.002
	(−0.05)	(0.03)	(−0.02)
INV	0.122 ***	0.131 ***	0.142 ***
	(3.80)	(3.76)	(4.10)
PPE	−0.345 ***	−0.336 ***	−0.370 ***
	(−7.26)	(−5.30)	(−5.70)
Firm Fixed Effect	Yes	Yes	Yes
Industry Fixed Effect	Yes	Yes	Yes
Year Fixed Effect	Yes	Yes	Yes
Country Fixed Effect	Yes	Yes	Yes
_cons	1.796 ***	1.764 ***	1.657 ***
	(3.86)	(3.74)	(3.52)
r2	0.258	0.257	0.261
r2_a	0.249	0.248	0.252
N	4280	4280	4280

t Statistics in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01.

presents the results of the robustness test using an entropy balancing approach to minimize potential bias due to differences in observation characteristics and covariate imbalance issues. After weight adjustments, the relationship between Key Audit Matters (KAM) and greenwashing remains consistent with the main results. All KAM proxies—number of KAMs (KAM_NUMB), word count-based readability (WORDS), and specification level (SPECIFICATION)—show negative and significant coefficients, indicating that increased KAM quality and readability are consistently associated with decreased greenwashing practices. The magnitude and significance of the coefficients are relatively stable compared to the baseline model, indicating that the results are not driven by differences in specific company characteristics. The control variables also maintain similar direction and significance as in the main test. Overall, these findings strengthen the causal validity of the study results and provide evidence that the role of KAM readability in suppressing greenwashing is robust to alternative estimation approaches.

Table 7. Lagged Independent Analysis.

	(1)	(2)	(3)
	GREENWASHING	GREENWASHING	GREENWASHING
KAM_NUMB (t−1)	−1.182 ***
	(−2.781)
WORDS (t−1)		−1.395 ***
		(−2.674)
SPECIFICATION (t−1)			−1.874 ***
			(−3.621)
BSIZE	0.218 ***	0.226 ***	0.221 ***
	(6.984)	(7.113)	(6.957)
DUAL	−0.431 **	−0.417 **	−0.389 **
	(−2.247)	(−2.203)	(−2.116)
INDP	0.042	0.046	0.038
	(0.984)	(1.012)	(0.801)
BIG4	0.003 ***	0.002 ***	0.003 ***
	(3.114)	(3.287)	(3.102)
FSIZE	−0.295 ***	−0.302 ***	−0.288 ***
	(−5.103)	(−5.188)	(−5.021)
ROA	0.006	−0.007	−0.012
	(0.112)	(−0.244)	(−0.412)
TOP1	−0.021 ***	−0.023 ***	−0.024 ***
	(−4.301)	(−4.115)	(−5.201)
REC	−0.006	−0.004	−0.007
	(−0.312)	(−0.201)	(−0.356)
OTHER	0.264 ***	0.271 ***	0.276 ***
	(3.041)	(3.082)	(3.117)
LEV	0.087 ***	0.091 ***	0.102 ***
	(3.421)	(3.572)	(4.046)
QUICK	−0.001 **	−0.001 **	−0.001 **
	(−2.072)	(−2.102)	(−2.157)
LOSS	0.472 ***	0.493 ***	0.527 ***
	(2.987)	(3.045)	(3.26)
AUDITSWITCH	−0.003	0.002	−0.003
	(−0.051)	(0.032)	(−0.028)
INV	0.128 ***	0.136 ***	0.245 ***
	(3.804)	(3.761)	(4.122)
PPE	−0.347 ***	−0.339 ***	−0.372 ***
	(−7.262)	(−5.321)	(−5.701)
Firm Fixed Effect	Yes	Yes	Yes
Industry Fixed Effect	Yes	Yes	Yes
Year Fixed Effect	Yes	Yes	Yes
Country Fixed Effect	Yes	Yes	Yes
_cons	1.798 ***	1.584 ***	1.291 ***
	(3.811)	(3.749)	(3.524)
r2	0.262	0.259	0.266
r2_a	0.253	0.250	0.255
N	4280	4280	4280

t Statistics in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01.

presents the results of the lagged independent test to examine the temporal relationship between the main variables and greenwashing. The regression results indicate that all independent variables lagged by one period have a negative and significant effect on greenwashing. Specifically, KAM_NUMB (t − 1) shows a significant negative coefficient at the 1% level, indicating that an increase in the number of key audit matters in the previous period can reduce greenwashing practices. Similarly, WORDS (t − 1) and SPECIFICATION (t − 1) also have a significant negative effect, indicating that more informative and specific audit disclosure quality can increase transparency and reduce the potential for greenwashing in the subsequent period. The control variables show relatively consistent results, where board size (BSIZE), BIG4, leverage (LEV), company losses (LOSS), and investment intensity (INV) have a significant positive effect, while CEO duality (DUAL), company size (FSIZE), largest ownership (TOP1), and PPE have a significant negative effect. The stable R² value in the range of 0.259–0.266 indicates that the model has adequate and robust explanatory power.

4.5. Additional Analysis

Table 8. Sub-sample analysis.

Panel A. Indonesia Sample
	(1)	(2)	(3)
	GREENWASHING	GREENWASHING	GREENWASHING
KAM_NUMB	−1.277 ***
	(−2.72)
WORDS		−1.310 ***
		(−2.71)
SPECIFICATION			−2.011 ***
			(−3.48)
Control	Yes	Yes	Yes
Firm Fixed Effect	Yes	Yes	Yes
Industry Fixed Effect	Yes	Yes	Yes
Year Fixed Effect	Yes	Yes	Yes
Country Fixed Effect	Yes	Yes	Yes
_cons	1.693 ***	1.661 ***	1.558 ***
	(3.74)	(3.64)	(3.42)
r2	0.254	0.253	0.255
r2_a	0.242	0.249	0.244
N	2735	2735	2735
Panel B. Malaysia Sample
	(1)	(2)	(3)
	GREENWASHING	GREENWASHING	GREENWASHING
KAM_NUMB	−0.950 ***
	(−2.73)
WORDS		−0.720 ***
		(−2.93)
SPECIFICATION			−1.129 ***
			(−3.26)
Control	Yes	Yes	Yes
Firm Fixed Effect	Yes	Yes	Yes
Industry Fixed Effect	Yes	Yes	Yes
Year Fixed Effect	Yes	Yes	Yes
Country Fixed Effect	Yes	Yes	Yes
_cons	1.682 **	1.269 ***	1.472 ***
	(3.32)	(3.26)	(3.37)
r2	0.258	0.257	0.256
r2_a	0.246	0.244	0.249
N	2985	2985	2985

t Statistics in parentheses * p < 0.1, ** p < 0.05, *** p < 0.01.

presents the subsample analysis examining whether the relationship between KAM readability and corporate greenwashing differs across institutional settings in Indonesia and Malaysia. Overall, the results consistently indicate that higher KAM readability is associated with significantly lower levels of greenwashing in both countries, although the magnitude of the effects varies across contexts. Panel A reports the regression results for Indonesian firms. Across all specifications, the three proxies of KAM readability—KAM_NUMB, WORDS, and SPECIFICATION—show significantly negative coefficients at the 1% level. Specifically, the number of disclosed KAMs (KAM_NUMB) is negatively associated with greenwashing (β = −1.277, t = −2.72), suggesting that a greater quantity of auditor-highlighted risk areas enhances transparency and limits managerial opportunism in sustainability reporting. Similarly, the WORDS variable (β = −1.310, t = −2.71) indicates that more elaborated audit explanations may reduce information ambiguity and improve investor understanding. The strongest effect is observed for SPECIFICATION (β = −2.011, t = −3.48), implying that entity-specific and detailed audit narratives play a critical role in constraining impression management practices. These findings are consistent with signalling theory, where clearer and more informative audit communication reduces information asymmetry in environments characterized by evolving governance structures and relatively high informational frictions.

Panel B presents the results for Malaysian firms, which also show a significant negative association between KAM readability measures and greenwashing. However, the magnitude of the coefficients is relatively smaller compared to the Indonesian sample. KAM_NUMB (β = −0.950, t = −2.73), WORDS (β = −0.720, t = −2.93), and SPECIFICATION (β = −1.129, t = −3.26) remain statistically significant, indicating that readable and informative audit disclosures reduce greenwashing incentives even within a more mature institutional setting. The comparatively weaker effect sizes may reflect Malaysia’s relatively stronger regulatory enforcement, more developed sustainability reporting frameworks, and higher baseline governance quality, where audit communication serves more as a complementary monitoring mechanism rather than a primary governance substitute. Taken together, the subsample results suggest that KAM readability functions as an effective external governance mechanism across both countries, but its monitoring role appears stronger in Indonesia, where institutional constraints and information asymmetry are relatively more pronounced. These findings highlight the importance of considering institutional environments when evaluating the effectiveness of audit disclosure quality in mitigating greenwashing behavior.

5. Concluding Remarks and Recommendation

This study examines the role of Key Audit Matters (KAM) readability in curbing greenwashing practices in non-financial public companies in Indonesia and Malaysia during the 2020–2024 period. In the context of increasing attention to sustainability reporting, this study highlights the importance of audit communication quality as an external governance mechanism. Empirical results indicate that more readable KAMs, both in terms of language structure and level of specificity, are significantly associated with reduced greenwashing. These findings suggest that the informative value of KAMs is determined not only by their presence but also by the extent to which auditors are able to convey risks and professional judgments clearly and communicatively. Thus, KAM readability serves as a channel that strengthens auditor scrutiny and enhances managerial accountability for sustainability claims.

This research’s theoretical contribution extends the audit and sustainability literature by positioning the readability of the KAM as a critical determinant of auditor oversight effectiveness. This study broadens the understanding that auditors play a role not only in assessing traditional financial risks but also in limiting impression management practices in sustainability reporting. Furthermore, by examining the context of an advanced emerging market, this study demonstrates that audit mechanisms can function effectively even in institutional environments with relatively high levels of information asymmetry. The practical implications of these findings are broad. For auditors, the results emphasize the importance of developing clear, specific, and easily understood KAMs as part of a reputational and litigation risk mitigation strategy. Audit committees and boards of directors should consider the readability of KAMs as an indicator of the quality of risk communication and the consistency between sustainability claims and operational reality. From a regulatory perspective, these findings support the need for more explicit guidelines regarding the quality of KAM narratives, particularly in the context of sustainability issues, to enhance reporting credibility and strengthen investor confidence.

Limitation of the Study

Despite its contributions, this study has several limitations that should be acknowledged when interpreting the findings. First, the measurement of KAM readability relies on textual analysis, which may be sensitive to linguistic structure and reporting style differences across jurisdictions, potentially introducing measurement bias. Second, the sample includes only firms that disclose identifiable KAM sections and have complete sustainability-related data, which may result in selection bias toward firms with relatively higher disclosure transparency and governance quality. Third, although the empirical design incorporates various control variables, potential endogeneity concerns, such as reverse causality between governance quality and audit communication clarity, cannot be fully ruled out.

These constraints may influence the magnitude of the observed relationships, suggesting that the documented effects should be interpreted as associative rather than strictly causal. Future research may address these limitations by employing alternative identification strategies, such as quasi-experimental designs or instrumental variable approaches, to strengthen causal inference. Additionally, further studies could explore cross-country comparisons across different institutional environments, investigate the role of auditor characteristics and audit firm culture in shaping KAM readability, or incorporate advanced natural language processing techniques to capture deeper semantic attributes of audit disclosures. Examining interactions between KAM readability and specific corporate governance mechanisms may also provide richer insights into how audit communication enhances sustainability accountability.