Do Auditors Distinguish Management Ability, Compensation, and Power?

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 4: Auditor Pricing Studies

Abstract

In separate paragraphs, audit standards require auditors to consider management ability and compensation when assessing the risk of material misstatement in the integrated audit. Separate research finds compensation related to higher audit fees and management ability related to lower audit fees, suggesting that auditors do indeed assess the risk associated with these two management characteristics. However, audit standards do not explicitly require auditors to consider the interaction between management compensation and ability, or how management power impacts audit risk, either individually or jointly with management compensation. Using a sample of publicly traded firms from 2004-2011, we find that in addition to the separate effects of management ability and compensation, auditors recognize that management power impacts audit risk, increasing fees when management power, relative to the audit committee, is higher. However, we do not find evidence that auditors appropriately consider the potential joint effects of compensation, ability, and power on audit risk. Our results have implications for improving auditors’ risk assessment in the integrated audit.

Authors

• Elaine G. Mauldin, University of Missouri

• Anne Albrecht, University of Missouri