An experimental analysis of the factors impacting audit committee members' judgments and decisions

Two experiments were conducted to explore the impact of various pressures/incentives on the decisions made by audit committee members. The first experiment examined whether simultaneously imposed pressures related to form of audit committee member compensation (stock options versus cash) and risk of Public Company Accounting Oversight Board (PCAOB) inspection (likely or unlikely) cause audit committee members to make qualitatively different decisions when solving financial reporting disputes between management and the external auditors. Specifically, it was hypothesized that individuals receiving primarily option compensation would show greater support for management than those receiving cash and that those individuals with a high likelihood of inspection by the PCAOB would show greater support for the auditors than those with a low likelihood of inspection. A model was also proposed that predicted that likelihood of PCAOB inspection would moderate the effect of form of compensation on the side taken in these disputes. Participants were Executive MBA students from two large U.S. universities. Significant main effects were found for both form of compensation and likelihood of PCAOB inspection and the hypothesized interaction was also supported. The second experiment examined whether audit committee members' decisions are influenced to a greater degree by the financial expert on the committee whose occupational background is similar to their own. Participants were 30 actual audit committee members.