Audit Committee Incentives and the Resolution of Detected Misstatements

Document Type

Article

Publication Date

11-2015

Publication Source

Auditing: A Journal of Practice & Theory

Abstract

We investigate the role of audit committee economic incentives in judgments involving the resolution of detected misstatements. The results reveal a positive association between audit committee short-term stock option compensation and the likelihood that managers are allowed to waive income-decreasing misstatements that, if corrected, would have caused the company to miss its analyst forecast. Complementary results reveal a positive association between the audit committee long-term stock option compensation and the likelihood that managers are allowed to waive income-increasing misstatements when the company reports just missing, meeting, or beating its analyst forecast. These findings illustrate agency conflicts that can arise when compensating audit committees with options. We obtain these results while controlling for CEO option compensation and audit committee characteristics, along with indicators of corporate governance, auditor incentives, and company characteristics.

Inclusive pages

109-137

ISBN/ISSN

0278-0380

Comments

Permission documentation on file.

Publisher

American Accounting Association

Volume

34

Issue

4

Peer Reviewed

yes

Link to Full Text

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