This paper examines the impact of two elements of the client's control environment on auditor's assessment of the risk of material misstatement: audit committee strength and CEO narcissism, the latter of which is a component of management philosophy, operating style, and tone at the top. We predict and find that auditors' risk assessments are adequately responsive to both elements; however, importantly, a strong audit committee decreases perceived risk assessments only when the client has a CEO with less narcissistic characteristics. In other words, our findings suggest that the presence of narcissistic CEOs' attitudes weakens the perceived audit committee effectiveness, leading auditors to rely less on a strong audit committee. Our findings contribute to the auditing literature by exploring auditors' responses to the complex dynamics between management boards and those charged with governance. From a practical perspective, our results suggest that auditing standards and practice guidance should consider making such complexities and the role of management attitudes and styles even more explicit.
Bibliographical noteFunding Information:
We appreciate comments received from Arnold Wright from Northeastern University, Robert Knechel from University of Florida, Chun Keung (Stan) Hoi from Rochester Institute of Technology and participants of the 2019 European Accounting Association Congress (Paphos). This research received no specific grant from any funding agency in the public, commercial or not‐for‐profit sectors. The conference participation was funded by the School of Management at the University of Groningen.
© 2021 The Authors. International Journal of Auditing published by John Wiley & Sons Ltd.
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- audit committee strength
- auditor risk assessments
- CEO narcissism
- control environment