Audit Committee Accounting Expertise and the Mitigation of Strategic Auditor Behavior

The Accounting Review (Forthcoming)

54 Pages Posted: 25 Apr 2019 Last revised: 7 Aug 2020

See all articles by James C. Hansen

James C. Hansen

Weber State University Goddard School of Business and Economics

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Timothy A. Seidel

Brigham Young University

Michael S. Wilkins

University of Kansas

Date Written: July 2020

Abstract

Our study is motivated by the theory of credence goods in the auditing setting. We propose that audit committee accounting expertise should reduce information asymmetries between the auditor and the client, thereby limiting auditors’ ability to over-audit and under-audit. Consistent with this notion, our results indicate that when audit committees have accounting expertise, clients (1) pay lower fees when changes in standards decrease required audit effort; (2) pay a smaller fee premium in the presence of remediated material weaknesses; and (3) have a reduced likelihood of restatement when audit market competition is high. Our findings in the under-auditing setting generally are strongest among non-Big 4 engagements, consistent with non-Big 4 auditors being less sensitive to market-wide disciplining mechanisms such as reputation, legal liability, and professional regulation. We also provide evidence that the nature of audit committee members’ accounting expertise differentially impacts the committee’s ability to curtail over- and under-auditing.

Keywords: audit committee, accounting expertise, credence goods theory

JEL Classification: M40, M41, M42

Suggested Citation

Hansen, James C. and Lisic, Ling Lei and Seidel, Timothy A. and Wilkins, Michael S., Audit Committee Accounting Expertise and the Mitigation of Strategic Auditor Behavior (July 2020). The Accounting Review (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3377737 or http://dx.doi.org/10.2139/ssrn.3377737

James C. Hansen

Weber State University Goddard School of Business and Economics ( email )

1337 Edvalson St. Dept 3803
Ogden, UT 84408
United States
801-626-6433 (Phone)

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

3007 Pamplin Hall
Blacksburg, VA 24061
United States

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

Michael S. Wilkins (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
1654 Naismith Dr.
Lawrence, KS 66045
United States

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