The Impact on Auditor Judgments of CEO Influence on Audit Committee Independence and Management Incentives

37 Pages Posted: 28 Sep 2009 Last revised: 5 Dec 2012

See all articles by Jeffrey R. Cohen

Jeffrey R. Cohen

Boston College - Department of Accounting

Lisa Milici Gaynor

University of South Florida - School of Accountancy

Ganesh Krishnamoorthy

Northeastern University

Arnold Wright

Northeastern University - Accounting Group

Date Written: July 4, 2011

Abstract

Despite the importance of audit committee independence in ensuring the integrity of the financial reporting process, recent research suggests that even when audit committees meet regulatory independence requirements, certain factors, such as undue influence by the CEO over the selection of the audit committee, may diminish the ability of its members to be substantively independent. This study investigates whether auditors consider CEO influence over audit committee independence when making audit judgments where management’s incentives to manage earnings differ. In an experiment, we find that audit partners and managers waive a larger amount of a proposed audit adjustment when management’s incentives for earnings management are low than when incentives are high. However, when management incentives are high, auditors are less likely to waive as much of an adjustment when the CEO has less influence over the audit committee’s independence than when the CEO’s influence is greater. In all, the results support our expectations that auditors consider CEO influence on audit committee independence in the resolution of contentious accounting issues.

Keywords: audit committee, audit judgments, corporate governance, CEO influence, management incentives

JEL Classification: M41, M49

Suggested Citation

Cohen, Jeffrey R. and Gaynor, Lisa Milici and Krishnamoorthy, Ganesh and Wright, Arnold, The Impact on Auditor Judgments of CEO Influence on Audit Committee Independence and Management Incentives (July 4, 2011). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1479268

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)

Lisa Milici Gaynor

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Ganesh Krishnamoorthy

Northeastern University ( email )

360 Huntington Ave.
Boston, MA 02115
617-373-4651 (Phone)
617-373-8814 (Fax)

Arnold Wright

Northeastern University - Accounting Group ( email )

406 Hayden Hall
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
780
Abstract Views
3,074
rank
31,035
PlumX Metrics