Audit Committee Accounting Expertise and the Mitigation of Strategic Auditor Behavior

66 Pages Posted: 25 Apr 2019

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: April 24, 2019

Abstract

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

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 (April 24, 2019). 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 )

1016 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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