The Effects of Trust and Management Incentives on Audit Committee Judgments

Abstract

We investigate the effects of audit committee members' dispositional trust and management incentives on audit committee judgments. Results of an experiment indicate that: (1) When management has incentives to manage earnings, less trusting audit committee members are more likely to support the external auditor than are more trusting audit committee members; (2) when management has incentives to manage earnings, less trusting audit committee members are more likely to perceive that management is not credible, and more likely to perceive that management is being deceptive than are more trusting audit committee members; and (3) the interactive effects of trust and incentives on decisions to support the auditor are mediated by perceptions of management's intent to deceive.