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    The Influence of PCAOB Inspections on Audit Committee...
    research summary posted March 30, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.05 Interactions with Audit Committee Members, 11.0 Audit Quality and Quality Control, 11.10 Impact of Quality Reviewers 
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    Title:
    The Influence of PCAOB Inspections on Audit Committee Members’ Judgments
    Practical Implications:

    Research completed in the past has shown that short-term option compensation weakens audit committee member objectivity and oversight quality; this study confirms these findings. These results encourage investigation toward increasing saliency of the oversight role that the PCAOB plays, further research involving the role of an Engagement Quality Review, and understanding what characteristics of the members of the study led them to react to incentives.

    For more information on this study, please contact Julie Persellin.

    Citation:

    Persellin, J. S. 2013. The Influence of PCAOB Inspections on Audit Committee Members' Judgments. Behavioral Research in Accounting 25 (2).

    Keywords:
    Audit committees; PCAOB inspection, audit committee compensation, proposed audit adjustments, corporate governance
    Purpose of the Study:

    Prior research suggests that short-term option compensation possibly weakens audit committee member objectivity and oversight quality; in contrast, holding individuals accountable for their actions has been shown to result in less self-serving decisions in other former studies. These two results seem to be at odds, so a study was designed to develop a consensus and allow stakeholders to gain valuable insights into ways in which loyalties that have been potentially misaligned may be realigned by regulatory requirements aimed at improving the corporate governance process. Recent changes in PCAOB culture give the auditor more accountability over their decisions, so one would assume, based on the research described above, that the auditors would weigh each of their options more carefully. This paper investigates this scenario by manipulating the form in which audit committee members are compensated to determine whether:

    • The likelihood of an inspection by the PCAOB has the potential to serve as a monitoring mechanism for the audit firm
    • The likelihood of a PCAOB inspection has the potential to serve as a monitoring mechanism for the issuer’s audit committee
    Design/Method/ Approach:

    The authors use data from relevant previously conducted research articles from the late 2000’s and early 2010’s. Based on this data, they conducted an experiment in which they manipulated the form of the compensation received by different audit committees to see if their decisions varied. This experiment was conducted on Executive M.BA.s serving as audit committee members. 

    Findings:
    • Participants receiving primarily short-term options for compensation with a high likelihood of PCAOB inspection voiced greater support for requiring an audit adjustment be made.
    • Participants receiving primarily short-term options for compensation with a low likelihood of PCAOB inspection were not as vocal in calling for an audit adjustment.
    • Participants receiving cash for compensation were not at all phased by the likelihood of a PCAOB inspection.

    The results regarding the audit committee were not surprising overall with the majority claiming to agree to adjust their financials due to the experience of the auditor; however, some claimed that they agreed to the adjustment primarily because of how a regulatory agency, like the PCAOB, might view their decision not to require an audit adjustment be recorded. This supports the hypothesis that PCAOB risk, as opposed to client risk, is driving the results of an audit. The few audit committee members who decided not to adjust the financials cited management expertise as their primary reason for this decision. 

    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Impact of Quality Reviewers, Interactions with Audit Committee Members