What is it about?
This study investigateswhether boards of directors canmitigate the agency problems betweenmanagers and shareholders by being aware of the opportunistic earnings management encouraged by auditors’ economic incentives and actively adjusting performance-based compensation for the reduced earnings quality.
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Why is it important?
The use of managerial incentives to manage earnings in order to enhance accounting performance-based compensation is greater when auditors have economic incentives to compromise their independence. Hence, compensation committees face more difficulties in determining cash compensation when earnings quality declines.
Perspectives
These results suggest the urgent need to oblige companies to establish compensation committees, particularly in countries that lack such a mandatory requirement or where few companies have such committees.
Professor Bumjin Park
Soonchunhyang University
Read the Original
This page is a summary of: Auditors’ Economic Incentives and the Sensitivity of Managerial Pay to Accounting Performance, Australian Accounting Review, May 2017, Wiley,
DOI: 10.1111/auar.12154.
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