Thawing the “chilling effect”: How open leadership can improve audit transparency

In the high-stakes world of corporate governance, the audit committee (AC) acts as a vital watchdog, overseeing a company’s financial reporting to protect investors. To do their job effectively, these committees rely on external auditors to share not just the mandatory numbers, but also "discretionary" information — candid insights and potential concerns that go beyond the basic requirements.

However, a phenomenon known as the "chilling effect" often stifles this communication. When corporate management sits in on audit meetings, auditors frequently hold back information to avoid conflict or social pressure.

New research co-authored by professor Karim Jamal at the University of Alberta’s School of Business sheds light on a powerful solution to this problem: the leadership style of the audit committee chair.

The study, published in Accounting, Organizations and Society, finds that an "open" leadership style can effectively neutralize the pressure auditors feel when management is present, encouraging transparency even in tense environments.

The power of "psychological safety"

The research team — including Lukas J. Helikum, Hun-Tong Tan, and Li Xiao — conducted an experiment with 86 highly experienced auditors, including partners and managers from Big 4 accounting firms. They examined how two distinct leadership styles influenced what auditors were willing to share:

• The controlling audit committee chair: Focuses on a strictly scripted agenda and restricts the flow of information.
  
  
• The open audit committee chair: Encourages collaboration, invites questions, and creates a flexible agenda.

The results were clear. When an AC chair is "controlling," the presence of management significantly reduces the information auditors share. However, when the AC chair is "open," that chilling effect disappears. The supportive behavior of an open chair creates "psychological safety"—a sense that one can speak up without fear of negative consequences—which empowers auditors to be candid regardless of who else is in the room.

"An open audit committee chair acts as a counterforce that fosters greater psychological safety when management is present," explains Jamal, noting that this leadership style is crucial for regulators aiming to enhance corporate governance.

The double-edged sword of private meetings

The study also investigated the value of private meetings between the auditor and the AC chair held before the formal committee meeting. While these private sessions are becoming common practice (and are mandated in the UK), their impact has been debated.

The researchers found that while private meetings allow auditors to share more information in total, they actually lead to less information being shared during the subsequent formal meeting with the full committee.

This creates a "gatekeeper" dynamic where the AC chair holds critical information that the rest of the committee may not hear directly. While valuable for gathering insights, these private interactions reinforce the centrality of the AC chair and suggest that the full committee may miss out on details if they rely solely on the formal meeting.

Soft skills matter

For companies and investors, the implications are significant. While technical financial expertise is often the primary criterion for selecting audit committee members, this research suggests that "soft skills"—specifically the ability to foster an open, psychologically safe environment—are just as critical for the AC chair.

By prioritizing open leadership, companies can ensure their audit committees receive the unvarnished truth they need to protect shareholders and maintain market trust.

Key takeaways

• Leadership style trumps presence: An "open" audit committee chair can completely mitigate the "chilling effect" that management’s presence usually has on auditor candor.
  
  
• The danger of control: A "controlling" audit committee chair worsens the problem, making auditors even less likely to share discretionary info when management is present.
  
  
• The gatekeeper risk: Private meetings between the auditor and audit committee chair increase total information sharing but result in fewer issues being raised during the formal meeting with the full committee.
  
  
• Soft skills are strategic: Companies should recruit audit committee chairs not just for financial acumen, but for communication styles that promote psychological safety.
  
  Read Jamal’s full article in Accounting, Organizations and Society at DOI:10.1016/j.aos.2025.101618
  
  *This article was co-written using Gemini AI.

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