Problem directors on the audit committee and financial reporting quality

The objective of this paper is to examine empirically the consequences for financial reporting quality of having audit committees that include problem directors, that is, directors with prior involvement in corporate bankruptcies, major accounting restatements, or other accounting scandals. An ordinary least squares regression model is used to examine the association between problem directors on the audit committee and financial reporting quality as proxied by accruals and real earnings management. Results reveal that there is a positive association between the presence of problem directors on the audit committee and real earnings management, and this association is more pronounced in cases where those problem directors have been involved in prior instances of accounting restatements and fraudulent reporting practices.     

Internal audit: A comfort provider to the audit committee

This study, based upon four Belgian case studies, provides insights on (1) what drives the audit committee to look for the support of the internal audit function; and (2) what makes the internal audit function an expert at providing comfort to the audit committee [Pentland, B.T., 1993. Getting comfortable with the numbers: auditing and the micro-production of macro-order. Accounting, Organizations and Society 18 (7–8), 605–620; Carrington, T., Catasús, B., 2007. Auditing stories about discomfort: becoming comfortable with comfort theory. European Accounting Review 16 (1), 35–58]. We found that audit committees seek comfort, with respect to the control environment and internal controls, two areas in which they confront considerable discomfort. Besides the internal audit function's traditional assurance role, its involvement in improving internal controls provides a significant level of comfort to the audit committee. Internal auditors' unique knowledge about risk management and internal control, combined with appropriate inter-personal and behavioural skills, enables them to provide this comfort. Besides, their internal position, their familiarity with the company, and their position close to people across the company facilitate internal auditors being a major source of comfort for the audit committee. Formal audit reports and presentations, together with informal contacts, seem to be important symbols of comfort [Power, M., 1997. The Audit Society: Rituals of Verification. Oxford University Press, Oxford]. In addition, we found that the overall level of comfort to the audit committee can be enhanced via collaboration between internal and external auditing (the so-called ‘joint audit approach’).     

The retention of directors on the audit committee following an accounting restatement

Prior research suggests that corporate directors suffer the loss of outside board positions following a financial reporting failure. This loss of board positions, however, does not occur at the same rate for all outside directors. To examine this apparent discrepancy between director actions and consequences, I examine whether the retention of individual directors on the audit committee is related to director characteristics and/or CEO influence over the board of directors. Results indicate that the retention of directors on the audit committee is positively related to the influence of the CEO and weakly related to the qualitative characteristics of the audit committee member. I then classify my sample of restatements based on their underlying cause and re-examine the retention of audit committee members at restating firms. Results suggest that the involvement of the CEO in the nominating process can affect the composition of the audit committee at firms where restatements are the result of intentional misapplications of GAAP.     

The impact of audit committee expertise on audit quality: Evidence from UK audit fees

Governance regulators currently place great emphasis on ensuring the presence of financial expertise on audit committees (Sarbanes-Oxley, 2002; UK Corporate Governance Code 2010–2016). Underlying this is a belief that greater expertise enhances the effectiveness of audit committees and, by extension, the quality of the external audit. This study investigates the impact of audit committee expertise on one measure of audit quality - audit fees paid by FTSE350 companies. Our analysis finds that audit committees possessing greater levels of financial expertise are associated with higher audit fees. When we segregate financial expertise between accounting and non-accounting, we find that the positive impact identified is driven by non-accounting expertise. Furthermore, when we separate FTSE100 and FTSE250 firms we find the impact of financial expertise is confined to FTSE250 firms. Our findings are important as they highlight the usefulness of segregating financial expertise between specialists and non-specialists, something which regulators in the UK and in the USA currently do not do. Our findings also highlight the potential value of audit committee expertise in smaller as opposed to larger listed firms, suggesting that the value of expertise to audit quality depends on the specific financial reporting challenges firms face.     

The association between characteristics of audit committee accounting experts,audit committee chairs,and financial reporting timeliness

We investigate the association between audit committee (AC) members' financial expertise and financial reporting timeliness, and extend the discussion by investigating how the source of accounting expertise (e.g., public accounting or CFO) differentially influences financial reporting timeliness. We predict and find that AC accounting financial expertise is associated with timelier accounting information. Further, we find that accounting expertise gained from public accounting experience is associated with timelier financial reporting; however, accounting expertise gained from CFO experience is not. We also find that AC chairs (ACCs) with accounting expertise from public accounting experience are significantly associated with timelier financial reporting while ACCs with CFO-sourced accounting expertise are not. Our results are important for two reasons. First, our results suggest that AC accounting financial expertise contributes to AC effectiveness by improving the timeliness of financial information. Second, our findings highlight how personal characteristics of accounting financial experts influence contributions toward AC effectiveness.     

On the constitution of audit committee effectiveness

Pressures to perform and be effective are significantly influential within contemporary society, including within the realm of corporate boards of directors and audit committees. This paper adopts a social constructivist approach to better understand the process by which meanings regarding audit committee effectiveness are internally developed and sustained, within the small group of people who attend audit committee meetings. We conducted the investigation through interviews in three large Canadian public corporations listed on the Toronto Stock Exchange.     

Market reactions to ECB policy innovations: A cross-country analysis

Regulators have been paying increasing attention to governing and steering market fluctuations, with their role in shaping the economic cycle being ever more crucial. The combined effect of the financial and sovereign debt crises, as well as the approach to the zero lower bound, has made actions even more pressing, forcing the European Central Bank to resort to unconventional instruments to revive the economies and counter deflationary pressures. By using a combined event study and panel regression methodology, we investigate whether European Monetary Union equity markets react heterogeneously to standard and non-standard European Central Bank policy innovations. Our results show that conventional policies unevenly affect financial indices in the Eurozone and, hence, are bound to generate asymmetries that reflect on real economies, while unconventional measures, albeit with different intensities, exercise a homogeneous pressure on all markets. Our evidence highlights the beneficial impact of unconventional measures and suggests that they can play a useful role even in non-crisis times.     

Effects of audit committee chair characteristics on auditor choice,audit fee and audit quality

We investigate whether the characteristics of audit committee (AC) chairs are associated with decisions about auditor choice, audit fees and audit quality. Using hand-collected Australian data, firms with AC chairs who have longer tenure and multiple AC memberships across several boards are found to be more likely to choose Big 4 and/or industry specialist auditors, pay higher audit fees and have lower discretionary accruals. Those AC chairs with higher business qualifications are more likely to hire a Big 4 auditor, pay higher audit fees and have lower discretionary accruals, while AC chairs with professional qualifications are more likely to hire a Big 4 and/or industry specialist auditor. In contrast, firms with AC chairs who are executive directors are less likely to hire a Big 4 auditor and have higher discretionary accruals. Our findings contribute to the literature by documenting that various characteristics of AC chairs are important for enhancement of auditor selection and audit quality.     

The effect of audit firm size on audit prices: A study of the Australian Market

The effect of audit firm size on prizes is a complex function of competition in the market for audit services, product differentiation, and scale economics to large firms. In this study, a competitive market is supported in Australia with product differentiation to Bif Eight accounting firms. Specially, Big Eight accounting firms have significantly higher audit prices than non-Big Eight firms. This results holds for ‘large’ and ‘small’ auditees. A test is also made of price cutting in the Australian market. Price cutting is defined as lower initial audit fees than continuing engagement fees for a comparable audit. Test results do not evidence price-cutting behavior by accounting firms. There is in fact weak evidence that initial audit fees are higher than continuing engagement fee levels. Higher initial fees suggest that accounting firms may recover at least some of the audit start-up costs immediately.     

Overlapping membership between risk management committee and audit committee and bank risk-taking: Evidence from China

Although overlapping membership between risk management committee and audit committee is prevalent in banks' boards, the existing literature focuses on the impact of a single board committee on bank risk-taking. Using a sample of Chinese listed banks from 2007 to 2020, we examine whether and how overlapping membership between risk management committee and audit committee influences bank risk-taking. The results show that overlapping membership between risk management committee and audit committee reduces bank risk-taking. Furthermore, the risk-averse role of overlapping membership between risk management committee and audit committee is stronger in banks with weaker monitoring intensity and higher information acquisition costs. When exploring the potential channels of monitoring and information, we find that overlapping membership between risk management committee and audit committee helps reduce executive earnings management and make conservative interbank liability decisions. Finally, compared with other overlapping member characteristics, the role of overlapping risk management committee chair and financial experts in reducing bank risk-taking is more evident.     

The impact of audit committee quality on financial reporting quality and audit fees

This study examines the association between the quality of audit committees on financial reporting quality and external audit fees in an environment where the formation of audit committees was unregulated. The study uses a sample of 87 New Zealand firms in 2001 when no regulations or listing rules existed for audit committees. The results show no significant association between the quality of an audit committee and the quality of financial reporting. These results are robust to alternative measures of earnings quality. Similarly, the quality of audit committees has little impact on the level of fees paid to external auditors. The results suggest that the benefits of ‘best practice’ audit committees may be less than anticipated by regulators and policymakers.     

Making honest men of them: Institutional investors,financial reporting,and the appointment of female directors to all-male boards

In this paper, we theorize that dedicated institutional investors are more likely than transient institutional investors to appoint female directors to investee firms with all-male boards, particularly those with high opacity. We conjecture that dedicated investors appoint female directors as a governance mechanism to improve the financial reporting quality of these investee firms. Specifically, we find that through the appointment of female directors, dedicated institutional investors trigger the release of stockpiled negative accounting information, thereby increasing the likelihood of a stock price crash risk. We also show that dedicated investors, through the appointment of female directors, improve investee firms' corporate disclosure environment by decreasing earnings management. Finally, we find that through continued service on investee firms' boards, female directors reduce the future likelihood of a stock price crash.     

Investor reactions to key audit matters: Financial and non-financial contexts

We investigate how a disclosed risk item and key audit matter (KAM) relatedness combine to affect investors' riskiness assessment in financial and non-financial contexts. When management disclose a high-risk item, we find that investors react the same way across contexts with KAM relatedness having no effect. When management disclose a low-risk item, investors react differently in each context. When a KAM is related to the disclosed financial (non-financial) low-risk item, investors assess investment riskiness higher (lower) than when a KAM is unrelated to the low-risk item. Our findings indicate the varying communicative value of KAMs across financial and non-financial contexts.     

Impact of an audit reporting expert system on learning performance: A teaching note

Audit reporting is a complex process, requiring knowledge of various reporting issues and corresponding report formats. To address the difficulty of presenting audit reporting concepts to students, the authors constructed and used an audit reporting system, named AUDPORT, in their first-level auditing classes at two major state universities. This paper reports the use of AUDPORT as a teaching aid and its impact on students' performance.     

Geographic location of audit committee chairs and accruals quality: evidence from China

Review of Quantitative Finance and Accounting - Using a large sample of Chinese firms, we examine if the geographic proximity of audit committee chairs (ACCs) to firms is associated with...     

金融企业审计委员会的职能与运作

审计委员会是公司治理结构的重要组成部分,能有效协调委托人与代理人之间的关系.金融企业因其内在脆弱性,对审计委员会的要求更加突出.本文根据普华永道的调研资料,对金融企业审计委员会的四个主要职能以及审计委员会的建立与运作进行了详细介绍.     

The effect of audit committee characteristics on intellectual capital disclosure

This paper, using data from 100 UK listed firms, investigates the relationship between audit committee characteristics and intellectual capital (IC) disclosure. We find that overall IC disclosure is positively associated with audit committee characteristics such as the size and frequency of meetings, and negatively associated with audit committee directors' shareholding. We find no significant relationship between IC disclosure and audit committee independence and financial expertise. We also observe that the association between audit committee characteristics and IC disclosure varies with the IC components (i.e. human capital, structural capital and relational capital), suggesting that the underlying factors that drive various components of IC disclosure are different. These results have important implications for policy-makers in that they confirm that the effectiveness of audit committees in the corporate reporting processes is a function of certain characteristics.     

The impact of audit committee expertise on auditor resources: the case of Israel

Review of Quantitative Finance and Accounting - We investigate the association between internal audit resources and both audit committee financial expertise and independence using hand-collected...     

Former auditors on the audit committee and earnings management: Evidence from African banks

This paper investigates whether former auditors on the audit committee constrain earnings management through loan loss provisions. Based on an analysis of the annual reports of 82 African listed banks over the period 2011–2016, findings show that the presence of former auditors on an audit committee is associated with lower earnings management. This result suggests that audit committee members with auditing expertise and background contribute to effective monitoring of management’s accounting practices. Furthermore, results reveal that the reducing effect on earnings management of former auditors is strongest for directors who are unaffiliated with the bank’s current external auditor.