AbstractsBusiness Management & Administration

The Public Company Accounting Oversight Board (PCAOB) issued Release No. 2012- 001, which explicitly requires auditors to assess a company’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 2000–2010, 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 auditor’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 auditor’s going concern issuance decisions. Overall, I find that the auditor’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 auditor’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 PCAOB’s issuance of Release No. 2012-001. The findings of my research contribute to regulators by supporting the PCAOB’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 company’s executive incentive compensation programs, and auditors by highlighting the importance of conducting related audit procedures as part of the audit.