The effect of cash versus equity compensation on audit committee decision-making - evidence from the 2007 Deloitte censure

Abstract

Purpose This study aims to investigate the effect of cash versus equity compensation on audit committee decision-making after the Public Companies Oversight Board’s 2007 censure of Deloitte. Design/methodology/approach Using a sample of 2,588 firms, this paper uses two different compensation measurements to empirically examine the effect of audit committee compensation on decision-making. Findings The authors find that audit committee compensation effects the post-censure decision-making of Deloitte’s clients. The results support the hypothesis that cash compensation paid to audit committees influences audit committee members to retain their auditors post-censure. Additionally, there is some evidence to support the hypothesis that equity compensation increases the propensity to switch auditors post-censure. Practical implications This study will be of interest to regulators, policymakers and researchers as it provides further evidence in the area of audit committee decision-making and the effect of cash and stock compensation paid to audit committee members. Originality/value This study provides empirical evidence of the association between audit committee compensation and audit committee decision-making by investigating the effect of cash-based compensation and stock-based compensation on audit committee decision-making.

Audit committee cash compensation and related-party transactions: the role of directors’ affiliation

“…First, our findings enrich the literature on AC’s cash compensation. Although limited evidence suggests that cash compensation may affect the effectiveness of AC (Rickling and Sharma, 2017; Hope et al , 2019; Behrend and Pitman, 2022), evidence from emerging economies is scarce. One exception is Alkebsee et al (2021), who documented a positive association between ACs’ cash compensation and accruals.…”