Although contrasting viewpoints exist as to whether more equity-based compensation aligns with shareholders’ interest, empirical evidence suggests that the form of compensation has an impact on financial reporting quality and audit committee members’ objectivity.Despite these results, to date there is no authoritative guideline on the appropriate compensation structure for audit committees.

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Given that audit committee members are responsible for approving the purchase of NAS, which has the potential to impair auditor independence, and that compensation has the potential to influence audit committee members’ objectivity, this study examines the extent to which the structure of the compensation provided to the audit committee member influences their approval of NAS purchases in the post-Sarbanes-Oxley period.

Specifically, the study examines how cash and equity-based compensation (stock awards, and stock options) influence audit committee members’ decision to purchase NAS from the external auditor.

On the basis of a sample of Standard & Poor's 1500 firms that exhibit evidence of backdating, we find that firms with weaker governance structures that allow chief executive officers (CEOs) to exercise greater power over the board and its compensation committee are more likely to engage in CEO stock option backdating.

We also find that interlocking boards among backdating firms are associated with a higher incidence of backdating.

We also find that backdating firms restructure CEO compensation to rely less on stock options.

Finally, we learn the higher turnover extends to the General Counsel.

Because of the public scrutiny and political pressures associated with both CEO compensation and layoffs, we expect firms to alter CEO compensation by reducing bonus pay and increasing equity-based compensation as the magnitude of the layoff increases.

Consistent with the predicted substitution, we find that as layoffs intensify, CEOs' bonus compensation decreases and their equity-based compensation increases.

The analyses show that compensating audit committee members with cash is associated with fewer purchases of NAS.