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    Audit Committee Compensation, Fairness, and the Resolution...
    research summary posted February 16, 2015 by Jennifer M Mueller-Phillips, last edited March 3, 2015, tagged 13.0 Governance, 13.04 Board/Audit Committee Compensation 
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    Title:
    Audit Committee Compensation, Fairness, and the Resolution of Accounting Disagreements
    Practical Implications:

    When selecting members of the audit committee, our results suggest the need for the nominating committee to pursue individuals who place great emphasis on issues of fairness to shareholders. Beyond such initial screening, one way to improve the quality of the financial reporting process could be to educate audit committee members to explicitly consider outcome fairness to shareholders of the financial statement presentation, especially in matters that involve ambiguous accounting issues. This education process should help to emphasize that audit committee members need to consider stakeholders, such as current and prospective shareholders, above the potentially parochial views of management. Moreover, regulatory bodies may consider emphasizing the nature of the monitoring role of the board and how examining decisions through the lens of fairness may enhance the ability of the board to fulfill its monitoring role in a more effective manner.

    For more information on this study, please contact Dana Hermanson.

    Citation:

    Bierstaker, J., J. Cohen, D. Hermanson, and T. DeZoort. 2012. Audit Committee Compensation, Fairness, and the Resolution of Accounting Disagreements. Auditing: A Journal of Practice & Theory 31 (2): 131-150.

    Keywords:
    Audit committee, incentive compensation, fairness, disagreement.
    Purpose of the Study:

    An emerging body of research examines the relation of incentive-based audit committee compensation with accounting outcomes. We extend this literature by examining the effects of audit committee compensation and perceived fairness to shareholders on actual public company audit committee members’ judgments in accounting disagreements.

    Design/Method/ Approach:

    Fifty-six highly experienced public company audit committee members participated in an experiment involving an accounting disagreement between management and the external auditor, with three types of audit committee compensation (i.e., cash only, cash and short-term stock options, or cash and long-term stock options) manipulated between subjects. We also measured the participants’ perceptions of the fairness to shareholders if the auditor’s adjustment is not recorded. 

    Findings:

    We find that audit committee members are more likely to support the auditor in an accounting disagreement when audit committee compensation includes long-term stock options and when members perceive that failure to record the auditor’s adjustment is less fair to shareholders. Most significantly, we find that the relation between long-term incentive compensation and support for the auditor is fully mediated by a sense of fairness to shareholders. 

    Category:
    Governance
    Sub-category:
    Board/Audit Committee Compensation