Auditors' Communications with Audit Committees: The Influence of the Audit Committee's Oversight Approach

Abstract

Policymakers have identified effective communications between the auditor and the audit committee (AC) as an indicator of a quality audit, but little is known about the factors auditors consider when deciding what to communicate about significant accounting issues. We propose auditors use the AC's oversight approach as a cue for the level of detail in their communications that is necessary to satisfy the AC's preferences for auditors' insights on issues that were resolved with management. In our 2 X 2 experiment, auditors resolved an inventory obsolescence issue with a hypothetical CFO, and then wrote a communication about it for the AC. We manipulate the AC's preference for getting involved in the issue resolution process and its reputation for asking questions. Results support our proposal - auditors communicated the most details, including their insights on management's assumptions, to the AC that, by stepping back from the resolution process and establishing a reputation for proactively asking questions, relied on the auditors for insights and revealed a desire for such insights. Our results and findings from supplemental interviews with audit partners suggest auditors do not provide the same boilerplate communications to all ACs - they tailor their communications to the AC's oversight approach.

Keywords: accounting issues, audit committee oversight, auditor communications

JEL Classification: M41