How Audit Committee Chairs Address Information-Processing Barriers

Free, Clinton; Trotman, Andrew J.; Trotman, Ken T.

doi:10.2308/tar-2018-0379

Cited by 52 publications

(56 citation statements)

References 62 publications

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“…The audit committee forms an integral part of corporate governance structures and is tasked with the role of monitoring the quality of corporate financial and nonfinancial reporting and also the quality of financial audits and nonfinancial assurance engagements (Trotman & Trotman, 2015). The presence of an audit committee enables companies to disseminate reliable information, which assists in building stakeholder confidence (Free et al, 2021; Trotman & Duncan, 2018). Similarly, from a sustainability reporting and assurance perspective, research shows that audit committees play a vital role in overseeing the publication of credible sustainability reports (Al‐Shaer & Zaman, 2018) and ensuring that these disclosures are free from managerial capture (Appuhami & Tashakor, 2017; Farooq & De Villiers, 2019b).…”

Section: Introductionmentioning

confidence: 99%

Examining the extent of and determinants for sustainability assurance quality: The role of audit committees

et al. 2021

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This study examines the extent of and determinants for sustainability assurance quality. Data comprise sustainability assurance statements published by the top 100 listed companies in Australia and New Zealand from 2017 to 2019. The findings indicate that Australian companies lead their New Zealand counterparts in sustainability assurance. Although sustainability reporting has risen, assurance rates remain significantly low. Accountants dominate the market, and companies prefer to use their own auditors for sustainability assurance work. Sustainability assurance quality is poor and does not vary significantly among Australian and New Zealand companies.Low-quality sustainability assurance plays a limited role in mitigating potential stakeholder-agency conflicts. The regression analysis indicates that audit committee characteristics such as members' independence, industry/market expertise, and attending meetings enhance sustainability assurance quality, whereas audit committee size has no affect. These findings suggest that audit committee characteristics such as independence, industry expertise, and regular meeting attendance have the potential to reduce stakeholder-agency conflicts by improving the quality of sustainability statement assurance. Our findings build on the sustainability assurance literature by exploring current trends in sustainability assurance practices in Australia and New Zealand where corporate governance codes have been recently revised.Further, these findings are timely given recent changes in standards (International Standard on Assurance Engagements [ISAE] 3000 and Global Reporting Initiative[GRI]). Our study contributes to the audit committee literature and sheds light on the role played by audit committee characteristics on sustainability assurance statement quality. The study findings potentially offer useful insights for practitioners, standard setters, and regulators.

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Section: Introductionmentioning

confidence: 99%

Examining the extent of and determinants for sustainability assurance quality: The role of audit committees

et al. 2021

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“…While the audit committee as a whole is responsible for fulfilling this monitoring task, the AC chair plays a crucial role in ensuring that the audit committee effectively carries out its duties and leads the dialogue with management and the external auditor (Ghafran & Yasmin, 2018;Köhler, 2005). Therefore, research has increasingly focused on the role of AC chairs lately (e.g., Free et al, 2021;Ghafran & Yasmin, 2018;Khemakhem & Fontaine, 2019). The introduction of an upper limit of 12 years for tenure on supervisory boards in the recently published new version of the German corporate governance codex has refuelled the discussion about the appropriateness of tenure limits for board members in Germany.…”

Section: Introductionmentioning

confidence: 99%

The role of audit committee chair tenure—A German perspective

Nipper

2021

Int J Auditing

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This study empirically examines the association of audit committee chair tenure and various reporting quality measures in a German setting. As the debate about the role of tenure has refuelled since the German corporate governance codex first introduced an upper limit for director tenure in 2019, this topic is of particular importance. My findings show that longer tenured audit committee chairs are positively associated with higher levels of earnings management and negatively associated with the audit report lag and the likelihood of error identification by the German financial reporting enforcement panel. I draw upon social bonding to discuss these findings, which seem to be heterogeneous from a reporting quality perspective.I argue that social bonding between management and the AC chair drives the results for earnings management, while it does not impair the AC chair's influence on the audit process. My findings are important from a regulatory and practical perspective.

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“…Which viewpoint is more likely to hold is an empirical question and depends on which aspect of the AJR auditors focus on. We note, however, that compared to other decision makers in general, auditors tend to be systematically more conservative and more concerned with minimizing the risk of negative outcomes (Free et al 2018;Piercey 2011). This suggests that the alternative view deserves consideration, and that proponents' conjectures that an AJR would increase audit quality warrants empirical testing.…”

Section: Goal Activation Theorymentioning

confidence: 75%

“…Every proposed implementation of an AJR (as well as for similar business and medical judgment rules) allows auditors more freedom to select less traditional procedures provided that the auditors' decision is made in a rigorous, deliberate, and thoughtful manner (Kang et al 2015;Peecher et al 2013;SEC 2008). Further, auditors are systematically more conservative in taking judgment risks than other decision makers (see Free et al 2018;Piercey 2011). This raises the possibility that, in terms of goal activation theory, an AJR could activate auditors' directional goals for the most defensible procedures rather than their accuracy goals for the most effective procedures.…”

Section: Introductionmentioning

confidence: 99%

Does an Audit Judgment Rule Increase or Decrease Auditors' Use of Innovative Audit Procedures?

Kang

Piercey

Trotman

2019

Contemporary Accting Res

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The current audit environment encourages auditors to conduct defensive auditing procedures in lieu of using new, innovative, and potentially more effective audit procedures, due to concerns these procedures may be second‐guessed in litigation or by audit inspectors such as the PCAOB. As a result, auditors may prefer traditional “generally accepted” procedures over innovative procedures that are potentially more effective. We test recent proposals that an Audit Judgment Rule (AJR) encourages the use of innovative, and potentially more effective, audit procedures analogous to the similar Business Judgment Rule that affords legal protections to corporate directors. Under an AJR, litigators or audit inspectors could not second‐guess auditor judgments, even if they perceive that alternate judgments would have ordinarily been reached, provided the auditor's judgment was made in good faith and in a rigorous manner. However, the AJR's requirements that auditors must defend the rigor of their innovative judgments could potentially backfire and lead auditors to select more traditional procedures. Under the framework of goal activation theory, we conduct an experiment with audit managers and seniors and find that an AJR makes auditors less likely to select innovative audit procedures, particularly when audit risk is high. They do so despite believing the innovative procedures to be more effective than the traditional procedures. Findings from a supplementary experiment with experienced auditors further suggest that national office affirmation of the reasonableness of the procedures does not help overcome this effect. Overall, our findings suggest that an AJR may have the unintended consequence of further increasing auditors' focus on more traditional, and potentially less effective, audit procedures.

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How Audit Committee Chairs Address Information-Processing Barriers

Cited by 52 publications

References 62 publications

Examining the extent of and determinants for sustainability assurance quality: The role of audit committees

Examining the extent of and determinants for sustainability assurance quality: The role of audit committees

The role of audit committee chair tenure—A German perspective

Does an Audit Judgment Rule Increase or Decrease Auditors' Use of Innovative Audit Procedures?

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