Audit Committees’ Propensity to Challenge Significant Accounting Estimates: The Joint Effects of Investor Type and Transparency of Audit Committee’s Oversight Role

• In Event: Auditing Estimates

Abstract

Drawing on two perspectives of accountability, this study examines the joint effect of investor type and transparency of the audit committee (AC)’s oversight role on AC members’ propensity to challenge significant accounting estimates. Findings indicate the two factors significantly interact and lead AC members to be most challenging given sophisticated investors and when the forthcoming audit report is silent about the AC’s oversight role. Their questioning behavior drops significantly given unsophisticated investors and/or a forthcoming audit report that is more transparent about the AC’s role. Further analysis suggests this pattern is driven by AC members who are designated financial experts. The fact that AC members question less given an unsophisticated investor base is potentially disconcerting, given the SEC’s emphasis on investor protection. Moreover, these findings have implications for both research and practice inasmuch as the call for heightened transparency of the AC’s oversight role, herein, decrease AC member’s questioning behavior.

Author

• Yoon Ju Kang, Lehigh University