Do Audit Committees and Auditors Coordinate Effort? Evidence from Risk Areas, Materiality and Meetings

Abstract

We provide evidence on effort coordination and information sharing between audit committees and external auditors. We use four effort measures: the risk areas reported by both the auditor and committee, auditor-reported materiality, and committee meetings. We find that the number of risks reported by the auditor (committee) is positively related to the number of risks reported by the committee (auditor) and that lower materiality is associated with more risks that the committee discloses. The evidence also suggests that although risk areas are “sticky,” the committee identifies new risks faster, whereas the auditor focuses on shared risks. Next, our analysis indicates that audit process standardization influences reporting quality in a nonlinear manner. Finally, although audit fees tend to rise with auditor effort, they are unrelated to the committee’s effort. Our findings endorse the service perspective on auditing by emphasizing the collaborative nature of the audit process over individual actors’ self-interests. Data Availability: Data are available from public sources cited in the text. JEL Classifications: M41; M42; G38.