Audit Committee Chairs’ Objectives and Risk Perceptions: Implications for Audit Quality

Jürgen Ernstberger, Bernhard Pellens, André Schmidt, Thorsten Sellhorn, Katharina Weiβ

Research output: Contribution to journalArticlepeer-review

Abstract

Audit committee chairs (ACCs) are key links in the financial reporting value chain. Whereas prior literature analyzes how ACCs contribute to effective corporate governance, we investigate how ACCs’ personal incentives help explain their audit-related preferences and actions. Guided by a three-step risk management framework (risk identification, evaluation, and mitigation) we conduct semi-structured interviews with 23 ACCs of public German firms. First, we document how ACCs’ objective of avoiding financial reporting outcomes that pose personal (reputational) risks leads them to focus on specific attributes of management’s accounting judgments to evaluate their personal risks. Second, our data reveal that ACCs consider specific auditor attributes helpful in evaluating these risks. Concerning risk mitigation, we find that ACCs prefer to be actively involved in critical discussions with management rather than delegate these entirely to the external auditor. Overall, we document that ACCs’ concerns about personal risk can translate into different preferences (e.g., an aversion to even positive surprises) than concerns about governance effectiveness. These insights contribute to a more nuanced understanding of audit committees’ role in corporate governance, as well as about the enabling factors of audit quality.

Original languageEnglish
JournalEuropean Accounting Review
DOIs
StateAccepted/In press - 2024

Keywords

  • audit committee chairs
  • audit quality
  • interviews
  • personal risk management

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