Audit Committee Compensation, Fairness, and the Resolution of Accounting Disagreements

32 Pages Posted: 26 Aug 2009 Last revised: 16 Jan 2012

See all articles by James Lloyd Bierstaker

James Lloyd Bierstaker

Villanova University - School of Business

Jeffrey R. Cohen

Boston College - Department of Accounting

Todd DeZoort

University of Alabama - Culverhouse School of Accountancy

Dana R. Hermanson

Kennesaw State University - Department of Accounting

Date Written: January 15, 2012

Abstract

An emerging body of research examines the relation of incentive-based audit committee compensation with accounting outcomes (e.g., Archambeault et al. 2008; Magilke et al. 2009). We extend this literature by examining the effects of audit committee compensation and perceived fairness to shareholders on actual public company audit committee members’ judgments in accounting disagreements. Fifty-six highly experienced public company audit committee members participated in an experiment involving an accounting disagreement between management and the external auditor, with three types of audit committee compensation (i.e., cash only, cash and short-term stock options, or cash and long-term stock options) manipulated between subjects. We also measured the participants’ perceptions of the fairness to shareholders if the auditor’s adjustment is not recorded. We find that audit committee members are more likely to support the auditor in an accounting disagreement when audit committee compensation includes long-term stock options and when members perceive that failure to record the auditor’s adjustment is less fair to shareholders. Most significantly, we find that the relation between long-term incentive compensation and support for the auditor is fully mediated by a sense of fairness to shareholders. We offer implications and suggestions for future research.

Keywords: Audit Committee, Incentive Compensation, Fairness, Responsibility

JEL Classification: G30, G34, M10, M40, M41

Suggested Citation

Bierstaker, James Lloyd and Cohen, Jeffrey R. and DeZoort, Todd and Hermanson, Dana R., Audit Committee Compensation, Fairness, and the Resolution of Accounting Disagreements (January 15, 2012). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1462440 or http://dx.doi.org/10.2139/ssrn.1462440

James Lloyd Bierstaker

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Jeffrey R. Cohen (Contact Author)

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3165 (Phone)
617-552-2097 (Fax)

Todd DeZoort

University of Alabama - Culverhouse School of Accountancy ( email )

Tuscaloosa, AL 35487
United States

Dana R. Hermanson

Kennesaw State University - Department of Accounting ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6077 (Phone)
770-499-3420 (Fax)

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