The Interplay of Management Incentives and Audit Committee Communication on Auditor Judgment

Abstract

This study investigates the interplay of management and the audit committee on auditor judgments and evidence documentation. In a 2 × 2 between-subjects experiment, 58 experienced auditors were tasked with evaluating an inventory obsolescence issue when management's incentives to influence the auditor were either higher or lower. The auditors were also either provided or not provided with additional communicated expectations from the audit committee that opposed management's aggressive reporting preference. Drawing on research on competing preferences and source credibility theory, we predict and find that when management's incentives are higher, additional audit committee communication has a significant and positive impact on auditors' evidence evaluation and related judgments. However, we find no effect of added audit committee influence when management incentives are lower. These findings highlight the importance of examining the interrelationships among the various actors contributing to corporate governance and also inform standard setters about the benefits of increased communication between audit committees and auditors.

The Interplay of Client Management and the Audit Committee on Auditor Performance

“…While such interactions are likely to increase as a result of AS16, the audit process may further benefit from increased exchanges that include senior-level auditors who are primarily responsible for executing the audit plan. Overall, the findings from Brown and Popova (2016) highlight how the interrelationships among management, the audit committee, and the auditor are necessary to achieve high-quality financial reporting. Audit firms, companies, and regulators can better address how to enhance the audit committee's oversight role and improve financial reporting quality by recognizing management's role and significant influence on corporate governance.…”

“…The results of Brown and Popova (2016) provide important insights into how auditors integrate communicated expectations from the audit committee when performing an audit. In particular, the auditors in our study who were provided with additional communication followed the audit committee's guidance by requiring a more conservative inventory obsolescence estimate and also documented evidence that was more critical of management's expressed reporting preference, but only in conditions in which management was viewed as less credible.…”

“…We recently conducted a study (Brown and Popova 2016) to examine the joint influence of client management and the audit committee on auditor performance. In light of the recent passage of AS16, we were particularly interested in whether auditors are effectively integrating audit committee guidance communicated to the audit team.…”

International Standard on Auditing No. 260 and Audit Quality: Evidence from Jordan

“…Several previous studies have affirmed the vital role of audit committees in supporting external auditor especially when disagreements arise between auditors and their client management on accounting policies, estimates and the appropriate application of accounting standards (Park 2018;Brown & Popova 2015;Ng & Tan 2003;Knapp 1985;Knapp 1987;Stewart & Munro 2007;Brown-Liburd et al, 2016;Goodwin-Stewart & Kent 2006;Salleh & Stewart 2012) Two early prominent empirical studies investigated auditor"s ability to resist management pressure when technical disputes arise conducted by Knapp (1985Knapp ( ) & (1978. Knapp (1985) employed a full-factorial experiment using repeated measures technique and developed an experimental questionnaire of 16 randomly-ordered cases distributed to senior loan officers in the USA and sought their perceptions on factors affecting auditor"s ability to resist management pressure.…”

Board compensation and disclosure quality: corporate governance interference

“…Their findings totally demonstrated that the compensation payment structure has an effect on information transparency. Brown & Popova (2016) studied the relationship between managers' incentives and audit committee connections and its impact on auditors' decisions. They proved that the more directors' bonuses are, there will be more additional and unconventional relationships of audit committee and it will have greater impact on auditors' decisions.…”