Defense Date

4-13-2015

Degree Type

Dissertation

Specialization

Accounting

Chair or Co-Chair

Dr. Divesh Sharma

Committee Member or Co-Chair

Dr. Vineeta Sharma

Committee Member

Dr. Marcus Caylor

Abstract

Over the last decade, audit committee member compensation has shifted from a cash compensation structure toward a more equity-based compensation structure, with members on the audit committee holding substantially large equity positions. Although contrasting viewpoints exist as to whether more equity-based compensation aligns with shareholders’ interest, empirical evidence suggests that the form of compensation has an impact on financial reporting quality and audit committee members’ objectivity. Despite these results, to date there is no authoritative guideline on the appropriate compensation structure for audit committees. Non-audit services (NAS) have also been at the forefront of regulators’ attention in the last decade due to the economic bond that arises between the external auditor and the client, as a result of NAS purchases. Although regulators have not provided convincing evidence that NAS impair auditor independence, investors perceive that NAS have the potential to impair auditor independence, and hence, the quality of the audit. Given that audit committee members are responsible for approving the purchase of NAS, which has the potential to impair auditor independence, and that compensation has the potential to influence audit committee members’ objectivity, this study examines the extent to which the structure of the compensation provided to the audit committee member influences their approval of NAS purchases in the post-Sarbanes-Oxley period. Specifically, the study examines how cash and equity-based compensation (stock awards, and stock options) influence audit committee members’ decision to purchase NAS from the external auditor. The analyses show that compensating audit committee members with cash is associated with fewer purchases of NAS. Stock option compensation, in contrast, is associated with greater purchases of NAS, while stock award compensation is associated with a reduction in NAS purchases, when greater proportions of NAS are procured. In addition, equity compensation does not lead to a reduction in NAS. When examining the effect of the CEO on the NAS purchase decision, the findings reveal that the CEO has the ability to influence the proportion of NAS purchased. When CEO power is high, the audit committee purchases greater proportions of NAS. Lastly, when the audit committee has greater power than the CEO, the audit committee mitigates the CEO’s influence and reduces purchases of NAS. This study has practical implications for regulators, as it not only contributes to the debate on the ban on NAS, but provides insight into how the form of compensation plays a role in managing the potential threat to auditor independence, associated with the purchase of NAS. Lastly, it provides a greater understanding of the compensation structure that better aligns audit committee members’ interests with those of shareholders'.

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Accounting Commons

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