CAE Remuneration and Financial Reporting Quality

This paper reports on a study exploring the relationship between the fixed remuneration paid to the Chief Auditing Executive (CAE), and the subsequent financial reporting quality (FRQ). The study argues from the viewpoint that a strategy of compensation provided on the basis of company performance is detrimental to FRQ, and that when the CAE receives fixed remuneration, there is less threat to internal audit (IA) objectivity, and hence, greater FRQ as proxied by accruals quality. Data are obtained via a survey questionnaire, and information offered within annual reports. The findings indicate that when the CAE is compensated according to company performance, objectivity is reduced, with the consequent outcome that FRQ is impaired. Furthermore, when CAE remuneration and compensation are approved by the audit committee, rather than by the CEO, FRQ is higher. Evidence that the effects of IA objectivity are eliminated when the CEO is involved in approving CAE remuneration and compensation is also found. The study provides insights into the question of whether CAE remuneration enhances IA objectivity, and in doing so is of interest to audit committees with responsibility in that direction. Two different estimation methods are used as a means of confirming the robustness of these results. (C) 2021 ASEPUC. Published by EDITUM - Universidad de Murcia.