Audit Committee Independence and Auditor-Manager Disputes

• In Event: Management and the Board

Abstract

Conventional wisdom suggests that audit committee independence can strengthen auditor independence, increase audit quality, and thereby improve financial reporting quality and shareholders' value. Built on a one-period strategic model, this paper analyzes the role of audit committee independence in resolving disagreements between management and the auditor regarding financial reporting. We find that completely independent audit committees do not necessarily always agree with the auditor. The optimal level of audit committee independence that maximizes shareholders' value is affected by the trade-off between the losses of underinvestment and overinvestment, as well as the strategic interactions of shareholders, manager, auditor, and audit committee.

Authors

• Sandra Kronenberger, University of Mainz

• Sebastian Kronenberger, University of Mannheim

• Minlei Ye, University of Toronto