How do Behavioral Indicators of Audit Committee Effectiveness Influence Auditor Skepticism?

• In Event: Audit Committees, Professional Skepticism, and Auditor Judgment

Abstract

With the passage of AS No. 16, the PCAOB highlighted the importance of the audit committee’s (AC) role in the audit process. However, little empirical evidence exists regarding the AC’s effect on the financial reporting and auditing process. Here we examine how AC skeptical attitude and AC activity level affect auditor professional skepticism. We propose that ACs that are less active, or display a less skeptical attitude, will be assessed by auditors to have a weaker tone at the top. In turn, weak tone at the top will increase auditors’ professional skepticism as evidenced in their planning judgments. We test this prediction in a 2x2 between-participants experiment with practicing auditors in which we manipulate AC attitude (more vs. less skeptical) and activity level (more vs. less active). Consistent with our predictions, we find that auditors exhibit greatest skepticism under a less skeptical and less active AC, and that the effect of AC skeptical attitude is mediated by auditors’ assessment of tone at the top. We find that AC skeptical attitude and AC activity level interact so that the effect of AC activity level is greater when the AC has a less skeptical attitude.

Authors

• Yoon Ju Kang, University of Massachusetts, Amherst

• Marietta Peytcheva, Lehigh University

• Sanaz Aghazadeh, Lehigh University