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Can Audit Committee Expertise Increase External Auditors' Litigation Risk? The Moderating Effect of Audit Committee Independence

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  • Jillian Alderman
  • S. Jane Jollineau

Abstract

This study examines whether the perceived independence and financial expertise of audit committee members affect external auditors' exposure to legal liability. We use an experiment in which potential jurors make judgments about auditor independence and legal liability for a case involving an audit failure. We find that perceptions of audit committee independence from management are positively associated with judgments of auditor independence and negatively associated with auditor liability. However, financial expertise of audit committee members can be a double‐edged sword. Our experiment finds that judgments of auditor liability are higher when the audit committee is perceived to have higher financial expertise but lower independence from management. In assessing litigation risk of current and prospective clients, auditors may want to carefully consider the independence of audit committee members from management, particularly when audit committee members have financial expertise. In the event of an audit failure, the financial expertise of nonindependent audit committee members can negatively affect jurors' perceptions of auditor independence and liability. Les compétences financières du comité d’audit peuvent‐elles accroître le risque de litige auquel sont exposés les auditeurs externes? L’effet modérateur de l’indépendance du comité d’audit Les auteures se demandent si l’indépendance perçue et les compétences financières des membres du comité d’audit influent sur le risque de litige auquel sont exposés les auditeurs externes. Elles procèdent à une expérience dans laquelle des jurés potentiels portent des jugements au sujet de l’indépendance des auditeurs et de leur responsabilité juridique relativement à un cas d’échec de l’audit. Elles constatent que les perceptions quant à l’indépendance du comité d’audit à l’endroit de la direction sont en relation positive avec les jugements relatifs à l’indépendance des auditeurs et en relation négative avec la responsabilité juridique des auditeurs. Les compétences financières des membres du comité d’audit peuvent toutefois être une arme à double tranchant. L’expérience menée par les auteures révèle que la responsabilité juridique des auditeurs est jugée plus élevée lorsque le comité d’audit est perçu comme ayant des compétences financières supérieures mais une indépendance moindre à l’endroit de la direction. Dans l’évaluation du risque de litige associé aux clients actuels et potentiels, il se peut que les auditeurs souhaitent examiner attentivement l’indépendance des membres du comité d’audit à l’endroit de la direction, en particulier si les membres du comité d’audit possèdent des compétences financières. En cas d’échec de l’audit, les compétences financières des membres du comité d’audit qui ne sont pas indépendants peuvent avoir une incidence négative sur la façon dont les jurés perçoivent l’indépendance et la responsabilité juridique des auditeurs.

Suggested Citation

  • Jillian Alderman & S. Jane Jollineau, 2020. "Can Audit Committee Expertise Increase External Auditors' Litigation Risk? The Moderating Effect of Audit Committee Independence," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 717-740, June.
    • Handle: RePEc:wly:coacre:v:37:y:2020:i:2:p:717-740
    DOI: 10.1111/1911-3846.12549
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    References listed on IDEAS

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    1. Dan Dhaliwal & Vic Naiker & Farshid Navissi, 2010. "The Association Between Accruals Quality and the Characteristics of Accounting Experts and Mix of Expertise on Audit Committees," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 787-827, September.
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    5. Zhang, Yan & Zhou, Jian & Zhou, Nan, 2007. "Audit committee quality, auditor independence, and internal control weaknesses," Journal of Accounting and Public Policy, Elsevier, vol. 26(3), pages 300-327.
    6. Ali Faraji-Rad & Bendik M. Samuelsen & Luk Warlop, 2015. "On the Persuasiveness of Similar Others: The Role of Mentalizing and the Feeling of Certainty," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 42(3), pages 458-471.
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    1. Chambers, Valerie A. & Reckers, Philip M.J., 2022. "Auditor interventions that reduce auditor liability judgments," Advances in accounting, Elsevier, vol. 58(C).
    2. Obermire, Kara M. & Cohen, Jeffrey R. & Zehms, Karla M., 2021. "Audit committee members’ professional identities: Evidence from the field," Accounting, Organizations and Society, Elsevier, vol. 93(C).

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