The Effects of Audit Committee Financial Accounting Expertise and Recognition versus Disclosure on Chief Audit Executives' Tolerance for Financial Misstatements

Author

Ikseon Suh, Southern Illinois University CarbondaleFollow

Date of Award

5-2009

Degree Name

Doctor of Philosophy

Department

Accountancy

First Advisor

Rose, Jacob

Abstract

The present study examines and finds that internal auditors, particularly Chief Audit Executives, recognize financial accounting expertise as a significant base of audit committee (AC) power in the financial reporting process. However, such an AC expertise (i.e., financial accounting expertise) does not "counterbalance" internal auditors' perceived dependency on management or influence their decisions to monitor financial reporting quality. Instead, the cost-benefit analysis affects their decisions: (1) benefits of staying resolute to monitor financial reporting quality (i.e., "psychological empowerment"), and (2) costs of potential adverse reactions of management who exerts power over the internal audit. In addition, this study examines and finds that the financial reporting location (recognition vs. disclosure) has significant impacts on both internal audit reporting decisions and decisions to correct misstatements. Specifically, internal auditors' tolerances for disclosed misstatements reveal that they also feed the "vicious circle" of reliability expectations as external auditors do in a prior study (Libby, Nelson and Hunton, 2006).