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Auditing (A307)


accounting investigation; accounting negotiation; audit committee.


Bradley Pomeroy






the post-Enron environment, audit committee _AC_ members are under increased
scrutiny to demonstrate effectiveness in resolving significant accounting
issues. However, prior research suggests that AC members are not involved in
material auditor-client negotiations and that they are often not adequately
informed of the issue resolution process. Therefore, AC members may not be
effective in their oversight of the financial reporting process unless an
accounting decision is clearly aggressive or adequate information about the
decision is provided. In this study, I examine AC members’ investigation of
accounting decisions when they are _or not_ adequately informed of the
negotiation process that led to the decision and when the decision results in
an aggressive _versus conservative_ financial reporting outcome. The hypotheses
are developed from social psychology and research on corporate governance
practice suggesting that AC members investigate accounting decisions to reduce
discomfort in the financial reporting process by asking probing questions of
the auditors and management. The results indicate that negotiation knowledge
increases AC discomfort but has no effect on AC investigation, perhaps because
potential questions were adequately addressed by the available information. I
also find that AC members investigate more extensively as accounting decisions
become increasingly aggressive and AC members with accounting experience are
particularly thorough in their investigations when accounting decisions are
aggressive. The results of this research have important implications to
practice and future research.




Vol 29, Nomor 01 CD, Tahun 2010


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