SUMMARY: In the post-Enron environment, audit committee (AC) members are under increased scrutiny to demonstrate effectiveness in resolving significant accounting issues. However, prior research suggests that AC members are not involved in material auditor-client negotiations and that they are often not adequately informed of the issue resolution process. Therefore, AC members may not be effective in their oversight of the financial reporting process unless an accounting decision is clearly aggressive or adequate information about the decision is provided. In this study, I examine AC members’ investigation of accounting decisions when they are (or not) adequately informed of the negotiation process that led to the decision and when the decision results in an aggressive (versus conservative) financial reporting outcome. The hypotheses are developed from social psychology and research on corporate governance practice suggesting that AC members investigate accounting decisions to reduce discomfort in the financial reporting process by asking probing questions of the auditors and management. The results indicate that negotiation knowledge increases AC discomfort but has no effect on AC investigation, perhaps because potential questions were adequately addressed by the available information. I also find that AC members investigate more extensively as accounting decisions become increasingly aggressive and AC members with accounting experience are particularly thorough in their investigations when accounting decisions are aggressive. The results of this research have important implications to practice and future research.
