Audit Committee Incentives and the Resolution of Detected Misstatements

44 Pages Posted: 21 Feb 2015

See all articles by Marsha B. Keune

Marsha B. Keune

University of Dayton

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: February 19, 2015

Abstract

We investigate the role of audit committee economic incentives in judgments involving the resolution of detected misstatements. The results reveal a positive association between audit committee short-term stock option compensation and the likelihood that managers are allowed to waive income decreasing misstatements that, if corrected, would have caused the company to miss its analyst forecast. Complementary results reveal a positive association between the audit committee long-term stock option compensation and the likelihood that managers are allowed to waive income-increasing misstatements when the company reports just missing, meeting, or beating its analyst forecast. These findings illustrate agency conflicts that can arise when compensating audit committees with options. We obtain these results while controlling for CEO option compensation and audit committee characteristics, along with indicators of corporate governance, auditor incentives, and company characteristics.

Keywords: Audit Committees, Book-or-Waive Decisions, Error Correction, Materiality

Suggested Citation

Keune, Marsha B. and Zehms, Karla M., Audit Committee Incentives and the Resolution of Detected Misstatements (February 19, 2015). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2567472

Marsha B. Keune (Contact Author)

University of Dayton ( email )

Dayton, OH 45469
United States

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
232
Abstract Views
995
rank
130,967
PlumX Metrics