Audit Committee Incentives and the Resolution of Detected Misstatements

Keune, Marsha B.; Johnstone, Karla M.

doi:10.2308/ajpt-51080

Cited by 39 publications

(46 citation statements)

References 48 publications

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“…Keune and Johnstone () find that audit committee stock ownership is positively associated with waiving audit adjustments that, if corrected, would have caused the company to miss analyst expectations, suggesting that audit committee stock ownership can weaken the resolve to take actions that would negatively impact the company's stock price.…”

mentioning

confidence: 99%

Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses

Lisic

Myers²,

Seidel

et al. 2019

Contemporary Accting Res

110

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In this study, we examine whether audit committee accounting expertise helps to promote audit quality by motivating auditors to conduct diligent internal control audits and make appropriate internal control assessments because audit committee accounting expertise safeguards auditors from dismissal following adverse internal control opinions. Among clients with existing and likely internal control material weaknesses (as proxied by future restatements of audited financial statements), we find a greater likelihood of adverse internal control audit opinions when the audit committee has greater accounting expertise (measured by the proportion of accounting experts on the audit committee). Among all clients, we find a lower likelihood of subsequent auditor dismissal following an adverse internal control audit opinion when the audit committee has greater accounting expertise. In further analyses, we find that this lower likelihood of subsequent auditor dismissal occurs when at least two audit committee members possess accounting expertise. We also find some evidence that CFO influence (but not CEO influence) over the audit committee negates the increased likelihood of adverse internal control opinions when internal control material weaknesses likely exist, as well as the decreased likelihood of auditor dismissal following adverse internal control opinions. These findings have important implications for regulators and corporate nominating committees interested in promoting audit committee effectiveness.

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mentioning

confidence: 99%

Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses

Lisic

Myers²,

Seidel

et al. 2019

Contemporary Accting Res

110

View full text Add to dashboard Cite

show abstract

“…Recent empirical studies examining how equity compensation influences AC independence provide mixed evidence. On the one hand, some studies find that AC equity compensation is associated with larger discretionary accruals (e.g., Bedard et al 2004), higher likelihood of restatement (e.g., Archambeault and Hermanson 2008), beating analyst earnings benchmarks (e.g., Campbell et al 2015), and income misstatements (e.g., Keune and Johnstone 2015). On the other hand, Sengupta and Zhang (2015) find that larger AC equity compensation is associated with higher disclosure quality (measured by management earnings guidance and dispersion of analyst forecasts) and lower cost of equity capital.…”

Section: Related Literature and The Relation Between Audit Fees And Amentioning

confidence: 99%

Is Audit Committee Equity Compensation Related to Audit Fees?*

Liu¹,

Lobo

2020

Contemporary Accting Res

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Section 301 of the Sarbanes‐Oxley Act (SOX) implicitly assumes that audit committees can independently determine audit fees. Critics of section 301 have questioned this assumption in particular, and the efficacy of section 301 more generally. In response, the SEC issued a concept release in 2015 calling for public disclosure of the process that audit committees follow for determining auditor compensation. Motivated by these calls and the widespread use of stocks and options to compensate firms' independent directors, we examine the relation between equity compensation granted to audit committee members and audit fees. Using a sample of 3,685 firm‐year observations during 2007–2015, we find a negative relation between audit committee equity compensation and audit fees, consistent with larger equity pay inducing audit committee members to compromise independence by paying lower audit fees. These findings are robust to controlling for endogeneity, firm size, alternative measures of equity compensation, alternative samples, and an alternative treatment of extreme values. We further show that larger equity compensation is associated with lower earnings quality. We also find that the negative effect of equity compensation on audit fees is stronger when city‐level audit market competition is high. However, this negative relation disappears when (i) firms face high litigation risk, (ii) auditors have stronger bargaining power, (iii) the audit committee includes a high proportion of accounting experts, and (iv) auditors are industry experts. Our results are relevant for regulators and investors.

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“…The empirical results of the studies on audit committee compensation provide evidence that certain forms of equity compensation appear to impair the audit committee's monitoring effectiveness and the quality of financial reporting. Specifically, stock options are associated with a greater likelihood of firm restatements (Archambeault et al 2008), internal control weaknesses (Cullinan et al 2010), or managed earnings (Campbell et al 2015;Keune and Johnstone 2015). Cash compensation, in contrast, seems to promote greater oversight of the financial reporting process, as greater cash compensation is related to a lower likelihood of firms exceeding analysts' earnings forecasts (Rickling and Sharma 2017).…”

Section: Implications For Practice Policy and Researchers Implicatimentioning

confidence: 99%

The State of the Literature on Audit Committee Compensation and Its Implications for Practice and Research

Hayek

2018

Current Issues in Auditing

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SUMMARY The compensation structure of audit committee members has shifted over time to comprise greater proportions of equity and less cash. Practitioners and researchers debate what mixture of cash and equity compensation promotes audit committee objectivity and financial reporting quality. This article summarizes the current state of the audit committee compensation literature and discusses the implications of these findings for future researchers, practitioners, and regulators.

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Audit Committee Incentives and the Resolution of Detected Misstatements

Cited by 39 publications

References 48 publications

Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses

Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses

Is Audit Committee Equity Compensation Related to Audit Fees?*

The State of the Literature on Audit Committee Compensation and Its Implications for Practice and Research

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