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Embargoed until 2016-10-31
Copyright: Sanoran, Kanyarat
Embargoed until 2016-10-31
Copyright: Sanoran, Kanyarat
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Abstract
The Public Company Accounting Oversight Board (PCAOB) issued Release No. 2012-
001, which explicitly requires auditors to assess a companyâ s executive incentive
compensation programs and conduct related audit procedures as part of the audit. I
examine the issues raised by this new amendment of PCAOB Auditing Standard and
extend existing research by investigating whether there is an association between
executive compensation incentives and the probability of the issuance of a going
concern modified audit report in the period 2000â 2010, the period immediately prior to
the issuance of Release No. 2012-001 for a sample of financially distressed U.S. public
firms. In addition, I also examine whether the introduction of the Sarbanes-Oxley Act
of 2002 (SOX) moderates the relationship between executive compensation incentives
and the auditorâ s decision to issue a going concern modified audit report. I analyze the
association between five components of executive compensation (stock options,
shareholdings, bonus, salary, and long-term performance plan) and the type of audit
report rendered to financially distressed companies. I also investigate whether different
components of executive compensation have a moderating effect on other components
of executive compensation in the context of auditorâ s going concern issuance decisions.
Overall, I find that the auditorâ s decision to issue a going concern modified audit report
is associated with executive salary, except when both Chief Executive Officer (CEO)
and Chief Financial Officer (CFO) salary are taken into consideration, and executive
shareholdings, except CFO shareholdings. I fail to find evidence that auditorâ s going
concern reporting decisions are associated with executive stock option compensation,
executive bonus compensation, and executive long-term performance based
compensation, except CFO long-term performance plan. I fail to find evidence that the
moderating effects are significant. Overall, my results support the PCAOBâ s issuance
of Release No. 2012-001. The findings of my research contribute to regulators by
supporting the PCAOBâ s concern regarding executive compensation incentives,
researchers by addressing a gap in the executive compensation and audit reporting
literatures, stakeholders by emphasizing the importance of evaluating a companyâ s
executive incentive compensation programs, and auditors by highlighting the
importance of conducting related audit procedures as part of the audit.