Auditor Role and the Conflicting Effects of Audit Committee Quality on Auditor Conservatism

Abstract

We examine the effect of Audit Committee (AC) quality on auditor conservatism from two perspectives that may be held by the auditors. The first perspective is that enhanced AC quality lowers audit risk, which allows auditors to be less aggressive when insisting on recording adjusting entries – resulting in smaller, less conservative audit adjustments. The second perspective is that high quality ACs are more independent of management and more supportive of auditors, which allows auditors to be more aggressive in negotiations with management – resulting in larger, more conservative audit adjustments. We find that senior managers appear to hold the first perspective and become more likely to waive adjusting entries under high-quality ACs. Partners appear to hold the second perspective and become less likely to waive adjusting entries under high-quality ACs. We attribute this difference in perspective to the different audit roles partners and senior managers play when considering and interacting with the audit committee.