The Effects and Potential Benefits of Audit Committee Oversight in a Strategic Setting

49 Pages Posted: 23 Nov 2020 Last revised: 9 Mar 2022

See all articles by Evelyn Patterson

Evelyn Patterson

Indiana University-Kelley School of Business

Reed Smith

Kelley School of Business

Samuel L. Tiras

Indiana University - Kelley School of Business

Date Written: March 8, 2022

Abstract

The purpose of this paper is to provide theoretical guidance for both analytical and empirical researchers, as well as regulatory agencies, by investigating the effects and potential benefits obtained from audit committee oversight in a strategic setting. Ever since Sarbanes-Oxley, a growing body of research has focused on the roles played by the audit committee, but few theoretical studies exist to guide this research. We focus on the audit committee's role in overseeing internal controls and the impact of whether or not the audit committee relies on management in designing the controls. We characterize how the nature of control risk changes, as well as how internal control strength is associated with overstatement, the expected probability of detection (audit effort, on average), and audit risk across two settings defined by the degree of audit committee oversight. As one example that highlights the importance of theoretical guidance, consider the literature's presumption that internal control strength is negatively associated with audit effort. Depending on the degree of direct audit committee oversight and the change in payoff parameters, we find that this association may be positive or negative as internal control strength changes.

Keywords: Strategic auditing, audit committee, internal control

JEL Classification: M42

Suggested Citation

Patterson, Evelyn and Smith, J. Reed and Tiras, Samuel L., The Effects and Potential Benefits of Audit Committee Oversight in a Strategic Setting (March 8, 2022). Available at SSRN: https://ssrn.com/abstract=3722346 or http://dx.doi.org/10.2139/ssrn.3722346

Evelyn Patterson (Contact Author)

Indiana University-Kelley School of Business ( email )

801 West Michigan
Indianapolis, IN 46202
United States
317-278-7843 (Phone)

HOME PAGE: http://kelley.iupui.edu/faculty/FacultyProfile.cfm?netid=evpatter

J. Reed Smith

Kelley School of Business ( email )

801 W Michigan Street
BS 4002
Indianapolis, IN 46202
United States
317-274-0867 (Phone)
317-274-3312 (Fax)

Samuel L. Tiras

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
121
Abstract Views
603
rank
311,906
PlumX Metrics