Audit Committee Accounting Expertise and the Mitigation of Strategic Auditor Behavior
66 Pages Posted: 25 Apr 2019
Date Written: April 24, 2019
We investigate whether audit committee oversight limits auditor opportunism. Our study is based on the notion that sellers of credence goods, including auditors, have information advantages that facilitate strategic behavior. We posit that audit committee accounting expertise should reduce information asymmetries between the auditor and the client that are driven by accounting and auditing complexities. Our tests suggest that audit committee accounting expertise mitigates auditors’ ability to overcharge, over-audit, and under-audit. Specifically, when audit committees have accounting expertise, clients (1) secure fee concessions when changes in professional standards decrease required audit effort; (2) pay a smaller fee premium in the presence of existing and remediated material weaknesses; and (3) have a reduced likelihood of restatement when audit market competition is high. Our findings generally are strongest among non-Big 4 engagements, consistent with non-Big 4 auditors being less sensitive to disciplining mechanisms such as reputation, legal liability, and professional regulation. We also provide some evidence that the nature of audit committee members’ accounting expertise differentially impacts the committee’s ability to curtail strategic behavior.
Keywords: audit committee, accounting expertise, credence goods theory
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