Audit Committee Compensation and Audit Quality

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 3: Corporate Governance

Abstract

The PCAOB has placed audit quality indicators on their current agenda. Prior research has found that audit committees’ stock options are positively associated with future earnings restatements (Archambeault et al. 2008) and whether firms meet or beat analysts’ forecasts of earnings (Campbell et al. 2015). We propose that audit committee compensation should be considered as an additional indicator of audit quality. We add to prior research and examine the association of audit committee compensation and discretionary accruals—another indicator of audit quality that has been used in academic research. We find that audit committee members’ cumulative stock option holdings and annual awards are positively associated with discretionary accrual levels. We also find that the percentage of audit committee members’ compensation that is paid in cash is negatively associated with discretionary accrual levels. We do not find a consistent association between non-option stock holdings and annual stock awards and discretionary accruals. These findings, and the findings from prior research, suggest that audit committee oversight appears to be impaired by stock option compensation. The findings in this study suggest that cash compensation strengthens audit committee oversight in regards to discretionary accruals.

Authors

• James C Hansen, Weber State University

• Keejae P Hong, University of North Carolina-Charlotte