The Effects of Corporate Governance Experience and Financial-Reporting and Audit Knowledge on Audit Committee Members' Judgments

TLDR

Audit committee importance has risen, focusing on member independence, experience, and knowledge. The study examines how audit committee members’ corporate governance experience and audit knowledge influence their judgments in auditor‑management conflict cases. Sixty‑eight audit committee members completed an accounting policy dispute case and multiple knowledge and ability tests. The study found that independent director experience and audit knowledge increased support for auditors’ substance‑over‑form positions, whereas concurrent board and senior management experience increased support for management, underscoring the need for all‑independent audit committees and highlighting systematic judgment differences tied to knowledge levels.

Abstract

Interest in audit committees as part of overall corporate governance has increased dramatically in recent years, with a specific emphasis on member independence, experience, and knowledge. This paper reports the results of a study investigating whether audit committee members' corporate governance experience and financial-reporting and audit knowledge affect their judgments in auditor-corporate management conflict situations. A sample of 68 audit committee members completed an accounting policy dispute case and several knowledge and ability tests. The results indicate that, as expected, greater independent director experience and greater audit knowledge was associated with higher audit committee member support for an auditor who advocated a “substance over form” approach in the dispute with client management. Conversely, concurrent experience as a board director and a senior member of management was associated with increased support for management. Collectively, these findings have a number of implications for practice and research. The results provide justification for calls that audit committees be composed completely of independent directors. The results also support auditor concerns that varying knowledge levels lead to systematic differences in audit committee member judgments in disputes between auditors and management.