The Impact of Audit Committee Skepticism and Reward Power on Auditor Communications with the Audit Committee

Abstract

Auditing standards emphasize the importance of strong auditor communications with the audit committee to enhance financial reporting quality. This study examines the effects of audit committee skepticism and reward power, two pervasive audit committee characteristics, on auditor communications with the audit committee. Drawing on accountability theory, we predict and find that greater audit committee skepticism and reward power induce the auditor to communicate more information and report on a more timely basis. Seventy-nine audit partners and managers participated in an experiment where we manipulate between-subjects high or low audit committee skepticism (quantity of probing questions) and high or low reward power (exercising full authority to hire/compensate the auditor versus relying on management). Participants responded to a realistic case regarding an inventory obsolescence issue. A follow-up experiment with 30 participants indicates significant mediation for accountability. The findings underscore the importance of audit committee skepticism and reward power in enhancing auditor communications.