American Accounting Association

AUGUST 3–7, 2013  •  ANAHEIM, CALIFORNIA

Session Title: Auditing Under High Uncertainty: Challenges and Limitations
Presentation Date: Tuesday August 6, 2013
Presentation Time: 2:00 pm-3:30 pm

Enterprise Risk Management and Financial Reporting Quality: The Experiences of Audit Committee Members, CFOs and External Auditors

Jeffrey Cohen, Boston College
Jeffrey Cohen, Boston College
Ganesh Krishnamoorthy, Northeastern University
Arnie Wright, Northeastern University

ABSTRACT: The financial crisis has brought to the forefront the need for companies to effectively manage their risk. One approach that has gained popularity is enterprise risk management (ERM) which looks at the risks to the firm as a whole and cross-functionally as opposed to evaluating risks within a particular department or function. The objective of this study is to examine how audit partners, CFOs and audit committee members (“the governance triad”) view ERM as it relates to risk and financial reporting quality. We conducted a qualitative study by interviewing 32 experienced individuals from 11 public companies that form 11 governance triads. Results suggest that across all three types of participants, the respondents emphasized the factor of risk assessment and operational efficiency/effectiveness when defining ERM. Interestingly, although CFOs and AC members also highlighted the strategic elements of ERM, auditors tended to be narrower and neglected to mention that factor. This suggests that auditors may be underutilizing ERM. Responses also indicated that participants viewed ERM from both an agency and resource dependence perspective with auditors more focused on the agency framework. Overall, the consensus among the triad was primarily for risk assessment with the CFOs and AC’s within each triad also showing greater consensus than auditors on strategic issues. Implications for practice and research are then discussed.

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