Audit Risk versus Negotiating Leverage and Accountability: The Effects of Audit Committee Quality on Auditor Conservatism

• In Event: Audit Quality 1

Abstract

Important research examines the effects of audit committee quality on audit outcomes by manipulating one audit committee variable at a time and interacting the chosen variable with independent audit environment variables (e.g. (Cohen et al. 2011). Many interesting interactions have been identified using this approach (e.g. (Ng and Tan 2003; Cohen et al. 2011; Brown-Liburd and Wright 2011). However, to date, behavioral research has not identified a main effect of audit committee quality on audit outcomes. By combining previous audit committee quality manipulations into one macro quality manipulation and holding interacting variables constant, we find a main effect of audit committee quality on audit adjustments. Perhaps more importantly, we also find that audit committee quality and auditor rank interact in a disordinal interaction, which may explain why past studies have not identified a main effect using mixed-rank auditor samples. Consistent with a risk-based audit approach, we find that both partner and senior manager auditors assess risk significantly higher given a low-quality audit committee. However, only senior managers’ adjustments to management estimates are larger (more conservative) as a result. More consistent with a governance view of the audit committee, partners’ adjustments more conservative given a high-quality audit committee.

Authors

• Marcus M. Doxey, The University of Alabama

• Linda McDaniel, University of Kentucky

• Robert J. Ramsay, University of Kentucky