Disclosure Of Audit Committees by Public Companies in Australia 1988–1990

The existence of audit committees in public companies can improve the quality of the financial reporting process, aid the actual and perceived independence of both the internal and external auditors, and improve financial statement users' confidence in the quality of the information. These benefits will be enhanced by disclosure of audit committees in the financial statements. This study examined the incidence and form of the disclosure of audit committees in annual reports by major Australian public companies over the period 1988–1990. The results showed that disclosures by larger companies increased during this time. Rates of disclosure varied considerably depending on the auditor and was positively associated with the size of the organisation. Companies with audit committees are encouraged to consider enhanced methods of disclosure such as those outlined in AUP 31 Communication with an Audit Committee.     

Corporate Disclosure Quality: Lessons from Australian Companies on the Impact of Adopting International Financial Reporting Standards

For annual reporting periods beginning on or after 1 January 2005, Australian companies were required to comply with the Australian equivalents of International Financial Reporting Standards (AIFRS). To ensure a smooth transition, a broadly defined standard (AASB 1047) mandated pre-adoption company disclosures of the AIFRS' impact. The standard provided managers with the opportunity to exercise considerable discretion in complying with the underlying disclosure requirements. We examine how this discretion impacted on the quality of pre-adoption AIFRS disclosures provided by a sample of large Australian companies. Using a disclosure quality index, we find considerable evidence of a cross-sectional variation in disclosure quality that varies according to differences in the AIFRS financial impact, size, industry and profitability factors. Importantly, we also observe individual Big 4 audit firm influences on disclosure quality. These findings highlight consequences of mandating corporate disclosures based on broadly defined principles.     

Mandatory Financial Reporting Processes and Outcomes

In an extension to the mandatory financial reporting literature, we consider compliance and applicability as intermediate stages in the disclosure decision process, and investigate to what extent these measures explain any variance in the quantity of disclosure. We use financial instruments disclosures as our empirical context because of the level of complexity and diversity of the mandatory requirements. We find that neither applicability nor compliance show statistically significant association with disclosure quantity. By contrast we find that a firm's financial instruments management programme is an important determinant of both applicability and quantity. Finally, we demonstrate the economic consequences of applicability, compliance and quantity through their association with audit fees. For companies that use financial instruments management programmes to a greater extent, audit fees are higher. In contrast, the quantity of financial instruments disclosures appears to reduce audit fees.     

Costs and benefits of auditors' disclosure of critical audit matters: Initial evidence from the United States

In an effort to make audit reports more informative to financial statement users, the Public Company Accounting Oversight Board (PCAOB) requires an expanded audit report in which auditors are required to disclose critical audit matters (CAMs). The new standard (AS 3101) became effective for audits of financial statements of large accelerated filers for fiscal years ending on or after June 30, 2019. Using a sample of annual reports of large accelerated filers with and without CAM disclosures, we examine the costs and benefits of the mandatory disclosure of CAMs in auditors' reports. Our evidence suggests that compared to auditor reports reporting no CAMs, the presence of a single CAM disclosure in the auditor's report provides incremental information to equity investors without a significant increase in audit costs. However, using the benchmark of a single CAM disclosure, multiple CAMs in an auditor's report results in higher audit fees and longer audit delays.     

The impact of corporate governance on Internet financial reporting

This study examines the association between corporate governance mechanisms and disclosure transparency measured by the level of Internet financial reporting (IFR) behavior. We measure corporate governance by shareholder rights, ownership structure, board composition, and audit committee characteristics. We develop a disclosure index to measure the extent of each sample firm’s IFR by presentation format, information content, and corporate governance disclosures. Results indicate that firms with weak shareholder rights, a lower percentage of blockholder ownership, a higher percentage of independent directors, a more diligent audit committee, and a higher percentage of audit committee members that are considered financial experts are more likely to engage in IFR. The findings suggest that corporate governance mechanisms influence a firm’s Internet disclosure behavior, presumably in response to the information asymmetry between management and investors and the resulting agency costs. Additional exploratory analysis indicates that the association between corporate governance and IFR varies with firm size. Our results suggest that new regulatory guidance in corporate governance leads to improved disclosure transparency via IFR.     

The Impact of Disclosures of Internal Control Weaknesses and Remediations on Investors' Perceptions of Earnings Quality

We hypothesize and find that firms making SOX‐mandated disclosures of material weaknesses in internal control over financial reporting (ICOFR) exhibit lower investor‐perceived earnings quality (IPEQ) than nondisclosers. We measure IPEQ using e‐loading, a market‐returns–based representation of earnings quality developed by Ecker, Francis, Kim, Olsson, and Schipper (2006). Firms do not exhibit decreases in IPEQ after initially disclosing material weaknesses. This is consistent with investors having anticipated ICOFR strength based on observable firm characteristics. However, firms exhibit increases in IPEQ after receiving their first clean audit reports that confirm the remediation of previously disclosed weaknesses. This indicates that, although investors do not find initial weakness disclosures to be incrementally informative, SOX motivates firms to remediate weak controls and provides a venue for credible remediation disclosures, thus enhancing investors' perception of financial reporting reliability. These findings are consistent with the existence of regulatory benefits associated with SOX's internal control disclosure and audit requirements.     

Audit Committee Members’ Reputation Incentives and Their Effectiveness in Monitoring the Financial Reporting Process

We examine whether the reputation incentives of audit committee members are associated with their effectiveness in monitoring the financial reporting process. Prior research assumes that audit committee members allocate their effort proportionately across all memberships on which they serve. However, our findings suggest that audit committee members with multiple audit committee memberships tend to focus their attention on the memberships that provide them with the greatest reputation incentives. Specifically, firms with a larger proportion of audit committee members where the membership is the most prominent are associated with higher financial reporting quality and more effective monitoring of internal control. Additional tests reveal that audit committee members’ reputation incentives are driving our results rather than independent non-audit committee members’ reputation incentives. We conclude that reputation is a strong incentive for audit committee members, such that it influences their monitoring effectiveness over the financial reporting process.     

Audit Firm Industry Specialization and Client Disclosure Quality

This paper provides evidence that clients select auditors as part of their overall disclosure strategy. We hypothesize that in addition to higher quality audits, industry-specialist audit firms assist clients in enhancing disclosures. We also posit that the choice of an industry-specialist auditor signals a clients intention to provide enhanced disclosures. However, we predict that industry-specialist audit firms are less important in regulated industries where enhanced disclosures add little value. Consistent with our hypotheses, we document a positive association between industry-specialist audit firms and analysts rankings of disclosure quality in unregulated industries, but no relation in regulated industries.     

Voluntary disclosures and information production by analysts

We analyze the voluntary disclosure decision of a manager when analysts scrutinize the quality of disclosure. We derive an equilibrium in which managers voluntarily disclose unfavorable information only if sufficiently precise, but disclose favorable news with lower levels of accuracy. We show that analysts cover good news disclosures with higher scrutiny. To the extent analysts rely on mandatory financial reports to interpret voluntary disclosures, we show that more precise financial reports may lead to more precise but less frequent voluntary disclosures. Moreover, a slant toward conservatism in financial reports can lead to less precise yet more frequent voluntary disclosures.     

Extreme Uncertainty and Forward‐looking Disclosure Properties

This study investigates the effect of extreme uncertainty on disclosure behaviour by analyzing the quality and quantity of forward‐looking disclosures during the global financial crisis and pre‐crisis periods, controlling for other determinants of disclosure behaviour. Prior research has struggled to distinguish between the quality and quantity dimensions of forward‐looking disclosures. Also, the impact of the recent financial crisis on these forward‐looking disclosure attributes has not yet been examined systematically. We address this gap by exploiting the unique setting of German publicly traded firms. These firms must provide forward‐looking information within their audited financial statements, although relevant regulation is sufficiently vague to allow great variation in the quality, scope and quantity of forward‐looking disclosures actually observed. Using hand‐collected data from 2005 to 2009, we provide evidence of a significantly negative association between crisis and disclosure quality. This finding is robust to several different disclosure quality proxies and regression specifications. In contrast, we find no negative significant relation between crisis and disclosure quantity; rather, there is evidence that reported volume increases during the crisis. Our results are consistent with extreme uncertainty, as occurring during times of crisis, negatively affecting the quality of voluntary disclosures, while firms maintain or increase disclosure quantity, ultimately diluting the information density of forward‐looking disclosures.     

Valuation impact of Sarbanes–Oxley: Evidence from disclosure and governance within the financial services industry

The Sarbanes–Oxley (Sarbox) legislation aimed to reduce the opacity of financial statements and improve the integrity of financial reporting by enhancing corporate disclosure and governance practices. We estimate the valuation effects of Sarbox for firms in the financial services industry and find that, except for securities firms, these firms significantly benefited from its adoption. As hypothesized, these positive effects may be attributed to expected improvement in the transparency of the relatively opaque financial services firms.We find that the cross-sectional variation in the valuation effects can be explained by disclosure and governance characteristics. Several of the significant factors are supportive of a compliance cost hypothesis. In particular, we find that the effects were less favorable for firms with less independent audit committees, without a financial expert on the audit committee, with less financial statement footnote disclosures, with less involved CEOs, and if they were smaller. In addition, reflecting the value of stronger governance, more favorable effects occurred for firms with a greater degree of independence of the board and the board committees, when there is greater motivation and ability of board members to monitor the firm, and with a greater degree of institutional ownership. Lastly, we find the wealth effects of firms viewed as non-compliant are significantly lower than firms viewed as compliant, and the variation across the group of non-compliant firms is explained by disclosure and governance measures.     

Privacy in E-Commerce: Development of Reporting Standards, Disclosure, and Assurance Services in an Unregulated Market

Government regulation of financial reporting by publicly listed firms, coupled with a punitive regime for violation of generally accepted accounting principles (GAAP), has been in place in the United States for seven decades. Whether this regime is effective or useful is an open question, especially in the absence of data on the behavior of unregulated economies. Privacy disclosure in e‐commerce is essentially an unregulated environment with some parallels to financial disclosure. A study of privacy standards, disclosures practices, and demand for audits can help accountants and security regulators project the consequences of a competitive regime sans regulation for accounting standards, disclosure and audit practices. In this article we set up a framework for such a study, gather data from the field, and analyze privacy standards, privacy disclosure practices, and the effectiveness of opt‐out practices of 100 high‐traffic e‐commerce Web sites. We observe four diverse sets of privacy standards (TRUSTe, BBB Online, WebTrust, and PWC Privacy) competing in this market, attracting clienteles of their own as reflected in privacy policies and the disclosure of such policies. With a few exceptions, actual disclosure and opt‐out practices correspond reasonably well to stated policies in e‐commerce. There is little evidence that the prevailing competitive regime induces a race to the bottom with respect to privacy standards and disclosures. We explore the implications of these results for the consequences of a competitive regime for regulation of financial reporting.     

The perceived credibility of forward-looking performance disclosures

We investigate the credibility of forward-looking performance disclosures (FLPDs) in the narrative sections of annual reports, as perceived by investors. Our proxy for these disclosures is an index of statements about future performance. We find that companies issue more FLPDs when raising debt or conveying bad news in the financial statements. In the presence of these managerial incentives, investor reliance on FLPDs increases with the quality of earnings reported in the audited financial statements. Our results suggest that firms derive a benefit in terms of higher credibility for their narrative disclosures from having a reputation for high quality earnings.     

FIRM RESOURCES,QUALITY SIGNALS AND THE DETERMINANTS OF CORPORATE ENVIRONMENTAL REPUTATION: SOME UK EVIDENCE

Using the example of the creation of corporate environmental reputation, the article offers a theoretical extension of the resource-based view of the firm to include quality signalling via the channel of accounting disclosure. The proposed framework is then tested via an empirical survey into the relationship between environmental disclosure and environmental reputation. The results suggest that implementation, monitoring and disclosure of environmental policies and their disclosure in annual reports contribute significantly to the creation of environmental reputation. Diverse institutional share ownership and low systematic risk are also associated with positive environmental reputation. Prior financial performance has no impact and there is no evidence that environmental reputation is created by a financial halo effect or by the availability of slack financial resources.     

Social disclosure, financial disclosure and the cost of equity capital

We test the relation between financial and social disclosure and the cost of equity capital for a sample of Canadian firms with year-ends in 1990, 1991 and 1992. We find that, consistent with prior research, the quantity and quality of financial disclosure is negatively related to the cost of equity capital for firms with low analyst following. Contrary to expectations, there is a significant positive relation between social disclosures and the cost of equity capital. This positive relationship is mitigated among firms with better financial performance. We consider some biases in social disclosures that may explain this result. We also note that social disclosures may benefit the firm through its effect on organizational stakeholders other than equity investors.     

The effect of disclosure committees on non-GAAP reporting quality

I examine whether company-implemented disclosure committees help to improve non-GAAP reporting quality. I find that firms with disclosure committees provide higher quality non-GAAP performance metrics and that the exclusions used to calculate their non-GAAP numbers are less persistent for future operating income and operating cash flows. Moreover, I find that firms with disclosure committees are less likely to receive SEC comment letters about non-GAAP disclosure. For firms that receive comment letters about non-GAAP reporting, disclosure committees can help to improve non-GAAP reporting quality. Comparing the influence of audit committees and disclosure committees, I find that audit committee financial experts have stronger monitoring effects than those on disclosure committees. Meanwhile, legal experts on disclosure committees provide similar monitoring compared to audit committees’ financial experts. Finally, the interaction between audit committee financial experts and disclosure committee legal experts produces the strongest effect on non-GAAP reporting quality. In sum, my analyses suggest that disclosure committees can provide important monitoring of non-GAAP reporting.     

On Litigation Risk and Disclosure Complexity: Evidence from Canadian Firms Cross-Listed in the US

We find that D&O insurance premiums for Canadian firms cross-listed in the US are more than twice those of Canadian-only listed firms, and audit fees are approximately 50% higher. While this supports the view that both service-providers view the US as a more litigious environment, our findings also suggest that these differentials for cross-listed firms reflect premia for both litigation risk and the complexity of firms' financial disclosures. In particular, we show that D&O liability insurers charge differently for cross-listed firms that have different levels of disclosure; while D&O premiums are significantly higher for all cross-listed firms, they increase and then decrease with increased disclosure complexity. In contrast, audit fees increase monotonically as the filing complexity increases. We also find that auditors appear to price abnormal premiums charged by D&O insurers. Thus, audit fee premia for cross-listed firms appear to capture aspects of both litigation risk and increased disclosure complexity.     

FRC intervention,financial reporting quality and due diligence

This study provides evidence of the relationship between government intervention, financial reporting quality and due diligence. Specifically, the authors examine the consequences of the disclosure of inspection reports by the Financial Reporting Council (FRC) for individual audit firms inspected in the UK. Using a difference-in-differences design, it is found that clients are more likely to receive qualified audit opinions during the post-disclosure period. This significant impact on reporting decisions is more concentrated among clients of small audit firms. Moreover, despite general efficiency during the sample period, clients affected by an FRC intervention experience longer delays in receiving their audit reports. Overall, this study contributes to literature on corporate governance and audit regulation, and has implications for policy making. FRC inspections are of greater concern to small audit firms than large firms, as the latter have already built a strong reputation. In general, the transparent inspection process may be beneficial in enhancing auditor oversight.