Jeffrey R. Cohen
Boston College
Ganesh Krishnamoorthy
Northeastern University
Arnie Wright
Boston College
Abstract: Given the recent financial malfeasance and governance breakdowns in the corporate world, the role of auditors in the governance mosaic is being more closely scrutinized than ever before. An important issue that should be paramount in the minds of all stakeholders is whether auditors are sufficiently sensitive to the type and strength of corporate governance when conducting an audit. The purpose of the study is to examine how the type (foci) of the board (agency and/or resource dependence) impacts auditors' judgments relating to audit program planning. This is the first study to our knowledge that directly addresses the impact of both the type of board and its strength on audit planning judgments.
To examine these issues, experienced assurance services partners and managers from one international accounting firm evaluated a case where the type of the board was manipulated in a 2 x 2 between-subjects design: agency (strong or weak) and resource dependence (strong or weak). The resource dependence perspective, proposes that good governance is achieved when board members are appointed for their expertise to help firms successfully cope with environmental uncertainty, provide access to external resources, and help set strategy of the firm. This model views governance from a positive proactive role, in contrast to the reactive role proposed by the monitoring function of an agency theory framework.
The findings indicate that auditors increased planned audit effort when the Board is assessed as weak and decreased audit effort when the Board is assessed as strong. Results also found a significant effect due to both the agency and the resource dependent variables. Interestingly, these results hold after controlling for the effects of clientÂ’s inherent and control risk, suggesting that auditors are sensitive to the strength and type of a clientÂ’s board when making audit program planning decisions. The implications for audit practice and theory are discussed in the paper.
Key Words: Corporate Governance, Audit Committee, Board of Directors, Audit Judgments
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