The effectiveness of audit committees for low‐ and mid‐cap firms

2011 ◽  
Vol 26 (7) ◽  
pp. 623-650 ◽  
Author(s):  
Won Sil Kang ◽  
Alan Kilgore ◽  
Sue Wright
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Stock Exchange ◽  
Reporting Quality ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Governance Reform ◽  
Content Type ◽  
Significant Measure

PurposeThe purpose of this paper is to investigate the effectiveness of recommendations made by the Australian Stock Exchange (ASX) relating to audit committees in Australia, and whether they have improved financial reporting quality for low‐ and mid‐cap listed firms.Design/methodology/approachThe authors examine the relation between characteristics of the audit committee and financial reporting quality for listed companies not mandated to comply with these requirements, i.e. low‐ and mid‐cap firms. For a sample of 288 firms, the authors regress measures of audit committee independence, expertise and activity and size on alternative measures of earnings management.FindingsA significant association is found between all three characteristics and lower earnings management. The significant measure for independence is the proportion of independent directors on the audit committee; for expertise, it is that at least one member of the audit committee has an accounting qualification; and for activity and size, it is the frequency of audit committee meetings.Practical implicationsThe results provide support for the mandatory establishment of audit committees for the top 500 (high‐ and mid‐cap) firms introduced by the ASX and suggest those audit committee characteristics which could improve financial reporting quality for low‐ and mid‐cap firms.Originality/valueThe paper examines low‐ and mid‐cap firms in order to complement previous similar studies done for high‐cap firms. It identifies the effects on financial reporting quality of voluntarily choosing to have an audit committee and of the choice of audit committee characteristics, in the period after substantial corporate governance reform. It includes a new measure among audit committee characteristics, industry expertise, which is required in Australia and is new to the literature.

scholarly journals An Investigation on the Audit Committees Effectiveness: The Case for GLCs in Malaysia

2011 ◽  
Vol 13 (3) ◽  
pp. 287 ◽  
Author(s):  
Nurul Nazlia Jamil ◽  
Sherliza Puat Nelson
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Financial Expertise ◽  
Monitoring Mechanism ◽  
The Impact

Financial reporting quality has been under scrutiny especially after the collapse of major companies. The main objective of this study is to investigate the audit committee’s effectiveness on the financial reporting quality among the Malaysian GLCs following the transformation program. In particular, the study examined the impact of audit committee characteristics (independence, size, frequency of meeting and financial expertise) on earnings management in periods prior to and following the transformation program (2003-2009). As of 31 December 2010, there were 33 public-listed companies categorized as Government-Linked Companies (GLC Transformation Policy, 2010) and there were 20 firms that have complete data that resulted in the total number of firm-year observations to 120 for six years (years 2003-2009).  Results show that the magnitude of earnings management as proxy of financial reporting quality is influenced by the audit committee independence. Agency theory was applied to explain audit committee, as a monitoring mechanism as well as reducing agency costs via gaining competitive advantage in knowledge, skills, and expertise towards financial reporting quality. The study is important as it provides additional knowledge about the impact of audit committees effectiveness on reducing the earnings management, and assist practitioners, policymakers and regulators such as Malaysian Institute of Accountants, Securities Commission and government to determine ways to enhance audit committees effectiveness and improve the financial reporting of GLCs, as well as improving the quality of the accounting profession.     

Audit committee ownership and audit report lag: evidence from Australia

2020 ◽  
Vol 28 (1) ◽  
pp. 96-125
Author(s):  
Md. Borhan Uddin Bhuiyan ◽  
Mabel D’Costa
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Financial Statements ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Audit Report ◽  
Content Type ◽  
External Auditors ◽  
Using Data

Purpose This paper aims to examine whether audit committee ownership affects audit report lag. Independent audit committees are responsible for overseeing the financial reporting process, to ensure that financial statements are both credible and released to external stakeholders in a timely manner. To date, however, the extent to which audit committee ownership strengthens or compromises member independence, and hence, influences audit report lag, has remained unexplored. Design/methodology/approach This paper hypothesizes that audit committee ownership is associated with audit report lag. Further, the author hypothesize that both the financial reporting quality and the going concern opinions of a firm mediate the effect of audit committee ownership on audit report lag. Findings Using data from Australian listed companies, the author find that audit committee ownership increases audit report lag. The author further document that financial reporting quality and modified audit opinions rendered by external auditors mediate this positive relationship. The results are robust to endogeneity concerns emanating from firms’ deliberate decisions to grant shares to the audit committee members. Originality/value The study contributes to both the audit report timeliness and the corporate governance literatures, by documenting an adverse effect of audit committee ownership.

Audit committee impact on the quality of financial reporting and disclosure

2016 ◽  
Vol 39 (12) ◽  
pp. 1639-1662 ◽  
Author(s):  
Mahdi Salehi ◽  
Mohammadamin Shirazi
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Stock Exchange ◽  
Panel Data Analysis ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Fiscal Year ◽  
Corporate Disclosure ◽  
Content Type

Purpose The purpose of this study is to shed further light on the characteristics of an audit committee (AC) and its probable relationship with the quality of financial reporting and disclosure. Based on the findings of extant research that there are different factors that may have implications for the AC’ effectiveness, the authors posit an association between the aforementioned financial aspects and AC presence. Design/methodology/approach The authors test their hypotheses by performing panel data analysis on a sample of 100 companies listed on the Tehran Stock Exchange (TSE) during 2013-2014. The tests were conducted by using Eviews software. Findings Examining previously tested characteristics of an AC, the authors indicate that the number of AC meetings held during fiscal year is negatively associated with the quality of corporate disclosure, whereas AC expertise and size are positively associated with the quality firm’s financial disclosure. Their findings are also indicative of a non-significant relationship between other AC attributes and financial reporting quality (FRQ) except for AC independence, which is positively associated with FRQ. Finally, they provide some evidence that the size of a firm positively affects the quality of its financial reporting and disclosure. Research limitations/implications Although the study has been thoroughly considered and cautiously planned, some limitations have yet arisen. Initially, this research was conducted in an Iranian setting where the formation of ACs is on the verge of regulation; therefore, the data utilized for the study only contains the two-year period of ACs’ statutory activity. In addition, a lack of consensus on the precise measures of an AC’s effectiveness could be considered as a restrictive factor. Originality/value The authors’ study contributes to the AC literature by providing empirical evidence of an association between ACs’ different attributes and financial aspects in a newly regulated environment like the TSE. The results provided in this paper could be fruitful for auditors, regulators, institutional investors and policymakers.

Audit committee and financial reporting quality: the moderating effect of audit quality

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sana Mardessi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Moderating Effect ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
Content Type ◽  
The Relationship

Purpose The purpose of this study is to address the impact of audit quality on financial reporting quality proxied by real earnings management. To further clarify the mentioned links, this study empirically assesses the moderating effect of audit quality. Design/methodology/approach The study is based on a sample consisting of 90 non-financial companies that are listed in the Amsterdam stock exchange in AEX all share index over the 2010–2017 period. This study applies a quantitative approach and secondary data as the main source of information for analysis. This paper performs an ordinary least squares regression to examine the moderating effect of audit quality on the relationship between financial reporting quality. Findings Empirical findings demonstrate that corporate governance mechanism, mainly independence members, financial expert and audit committee size has a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on real earnings management is not significant. There is also evidence that audit quality moderates the audit committee – real earnings management links. Originality/value This study extends the existing literature by examining the moderating effect of audit quality on the relationship between financial reporting quality proxied by real earnings management in the Dutch context.

Board and audit committee effectiveness in the post-ASX Corporate Governance Principles and Recommendations era

2017 ◽  
Vol 43 (10) ◽  
pp. 1137-1151 ◽  
Author(s):  
Maryam Safari
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Boards Of Directors ◽  
Audit Committee ◽  
Management Practices ◽  
Reporting Quality ◽  
Audit Committees ◽  
Content Type ◽  
Aggregate Effect

Purpose The purpose of this paper is to contribute to the corporate governance literature by examining the aggregate effect of board and audit committee characteristics on earnings management practices, particularly in the period following the introduction of the second edition of the Australian Securities Exchange (ASX) Corporate Governance Principles and Recommendations. Design/methodology/approach This paper begins by embarking on an extensive review of extant empirical research on boards of directors and audit committees. Then, the paper reports on the use of a quantitative analysis approach to specify the relationship between board and audit committee characteristics (introduced by the ASX Corporate Governance Council) and the level of absolute discretionary accruals as a proxy for earnings management. Findings The findings suggest that greater compliance with board and audit committee principles is linked to lower earnings management, indicating that deliberate structuring of boards and audit committees is an effective approach for enhancing a firm’s financial reporting quality and providing support for the efficacy of the second edition of principles and recommendations related to boards and audit committees suggested by the ASX Corporate Governance Council. Practical implications This study significantly extends the literature and has notable implications for financial reporting regulators, as the findings regarding the monitoring role of boards and audit committees should be beneficial for future revisions of corporate governance principles and recommendations. Originality/value This study focuses on the aggregate effect of board characteristics recommended by the Australian Corporate Governance Council on earnings management practices, and the results support the effectiveness of the board and audit committee characteristics recommended by the ASX Corporate Governance Council. New directions for future improvements to the principles and recommendations are identified.

Effective audit committee, audit quality and earnings management

2016 ◽  
Vol 6 (2) ◽  
pp. 138-155 ◽  
Author(s):  
Inaam ZGARNI ◽  
Khmoussi HLIOUI ◽  
Fatma ZEHRI
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Ordinary Least Squares ◽  
Financial Reporting Quality ◽  
Institutional Setting ◽  
Financial Security ◽  
Content Type

Purpose – A steady stream of literature has examined relationships between audit committee effectiveness, audit quality and financial reporting quality. The purpose of this paper is to connect these various streams of research to provide an empirical evidence from an Arabic emergent country namely Tunisia. This study examines the role of audit committee effectiveness and audit quality on financial reporting quality particularly to mitigate the earnings management in the Tunisian companies before and after financial security law adoption. Design/methodology/approach – The study uses ordinary least squares regression model to investigate the effect of audit committee characteristics, audit quality attributes and the interaction between these two overseeing mechanisms on earnings management for a sample of 29 non-financial listed Tunisian firms during the period 2001-2009. Findings – The results document a substitute effect between the presence of Big Four auditor and effective audit committee in order to reduce the discretionary accruals before the enforcement of law no. 2005-96 dealing with the financial securities. The authors find a complementarity link between the score of audit committee’s effectiveness and auditor industry specialization’s to constrain earnings management. Finally, the findings show a complementary relation between audit committee’s effectiveness and audit tenure, after the passage of the law. Research limitations/implications – This study shows the value of considering the institutional setting in governance research. This paper is restricted to firms in the Tunisia from 2001 to 2009. Future research should investigate this issue in other settings and periods. Practical implications – This study is important to practitioner and academic literature, policy makers and professional accounting bodies as it shows that legislative reforms can enhance companies to adopt good governance practices in emerging countries. The results also give useful information to investors in examination the effect of audit committee characteristics and audit quality on earnings quality. Another interesting practical focus of this study is to assess how successful was the implementation of financial security law in improving audit transparency and support shareholder involvement in the audit process. Originality/value – The results suggested that governance regulation is a substitute for strong governance mechanisms in both the pre- and post-law periods.

scholarly journals PERAN MODERASI KOMPETENSI KOMITE AUDIT PADA HUBUNGAN ANTARA STRUKTUR KEPEMILIKAN DAN KUALITAS PELAPORAN KEUANGAN

2017 ◽  
Vol 11 (1) ◽  
pp. 68-98
Author(s):  
Erik Gautama ◽  
Fransiskus E. Daromes ◽  
Suwandi Ng
Keyword(s):  
Financial Reporting ◽  
Ownership Structure ◽  
Audit Committee ◽  
Stock Exchange ◽  
Linear Regression Analysis ◽  
Reporting Quality ◽  
Foreign Ownership ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Family Ownership

This research is aimed to investigate the influence of the competence of audit committee on the relationship between the corporate ownership structure and reporting quality. We used secondary data, which is the annual report of listed companies at Indonesia Stock Exchange from 2013-2016 respectively. The sampling method is purposive sampling where the researcher obtained 116 companies as the sample. Data examination uses multiple linear regression analysis using IBM SPSS program (Statistical Program for Social Science) 20 in data processing. The results showed that family ownership, and foreign ownership has a positive but not significant effect on the financial reporting quality, while family ownership and audit committee competence has a positive and significant effect on financial reporting quality, as well as foreign ownership and audit committee competence has a positive and significant effect on the financial reporting quality. The result of this research is expected to be a consideration and recommendation for the firms to fill audit committees with people who have competence / expertise in accounting and finance and improve the ownership structure so that the monitoring function becomes effective and efficient in achieving the objectives of the conceptual framework of financial reporting which leads to reducing the manipulation of financial statements.

Audit committee attributes and cosmetic accounting in Nigeria

2019 ◽  
Vol 35 (2) ◽  
pp. 177-206
Author(s):  
Hussaini Bala ◽  
Noor Afza Amran ◽  
Hasnah Shaari
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Audit Fees ◽  
Financial Accounting ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Accounting Expertise

Purpose The literature on the influence of audit committees (ACs) and cosmetic accounting (CSA) is scarce. This paper aims to examine the influence of AC attributes on CSA and how this relationship is moderated by the audit price (AUPR). Design/methodology/approach The study used pooled logistic regressions to analyse 624 firm-year observations of listed companies in Nigeria from 2008 to 2016. Findings The results show that AC financial accounting expertise, AC legal expertise and female AC membership were negatively related to CSA. The negative relationship is highly pronounced when a firm incurs higher audit fees. Results for the robustness checks were similar, even with changes to the measurements of dependent and independent variables and alternative estimation. Practical implications This study can benefit policymakers and regulators, enabling them to better appreciate the importance of AC attributes and AUPR in curtailing artificial manipulation and enhancing financial reporting quality. Social implications This study can benefit policymakers and regulators, enabling them to better appreciate the importance of AC attributes and AUPR in curtailing artificial manipulation and enhancing financial reporting quality. Originality/value The findings provide an initial insight into the moderating effect of AUPR on the relationship between AC attributes and CSA.

scholarly journals Busy boards and corporate earnings management: an international analysis

2019 ◽  
Vol 18 (4) ◽  
pp. 533-556 ◽  
Author(s):  
Stephen P. Ferris ◽  
Min-Yu (Stella) Liao
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Corporate Earnings ◽  
The Usa ◽  
Reported Earnings

Purpose Because of our limited understanding of the incidence and effect of board busyness globally, the mixed evidence of the effect of board busyness obtained in the USA and the divergence of international patterns of director busyness from that observed in the USA, the author contends that there is a strong need to examine board busyness from a global perspective. The literature, however, does not examine the effect of board busyness on reported earnings quality and certainly does not analyze it internationally. Consequently, the purpose of this study is to examine the effect of multiple board appointments on the quality of a firm’s reported earnings. Design/methodology/approach The research design for this study is empirical. It uses both univariate and multivariate statistical analysis to examine historical corporate accounting, finance and governance data. Findings Consistent with the busyness hypothesis of corporate governance, the author finds that firms with a higher proportion of busy independent directors or busy CEOs manage their earnings more extensively. Further, the findings of this study present that firms with a higher proportion of busy independent audit committee members have poorer financial reporting quality. Using a sample of American Depository Receipts (ADRs), this study determines that the ineffectiveness of busy boards regarding earnings management is mitigated by the listing regulations imposed by US exchanges. Research limitations/implications The author believes that this study offers new and important evidence regarding the debate whether busy directors provide knowledge, skill and corporate connections, or whether they are overextended and, thus, unable to fully perform their monitoring duties. This study shows that firms with busy directors are associated with poorer financial reporting quality and, consistent with the busyness hypothesis, are less effective as managerial monitors. Practical implications This study provides useful guidance regarding board design and the kinds of policies that firms should adopt regarding multiple boarding. Social implications The social implications focus on the public policy implications regarding the importance of effective corporate governance in the reporting of financial wealth, wealth creation and wealth management. Originality/value This is the first study that examines the relation between board/committee busyness and corporate earnings management using a comprehensive set of international firms. Second, the author expands the analysis of audit committee into a new dimension: committee quality as captured by the busyness of its independent members. This study also contributes to the ongoing debate in the corporate finance literature regarding the reputation and busyness hypotheses of multiple directorships.

scholarly journals Audit committee disclosure tone and earnings management

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Habiba Al-Shaer ◽  
Mahbub Zaman
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Positive Association ◽  
Financial Reporting Quality ◽  
Future Research ◽  
Content Type ◽  
Computer Based ◽  
Disclosure Tone

PurposeThis paper examines the effect of audit committee (AC) reporting, measured by the tone of audit committee disclosures, in improving financial reporting quality as proxied by earnings management.Design/methodology/approachThe authors focus on the textual properties of AC reports, particularly the tone of AC disclosure, and their impact on financial reporting quality proxied using real and accruals-based earnings management. For additional analysis, the authors use a financial reporting index and matched sample. The analysis is based on a sample of UK FTSE 350 firms.FindingsThe analysis suggests that AC reports are not boilerplate but varied in language. The authors find AC reporting is negatively associated with both real and accruals-based earnings management. In our additional tests, the authors find a positive association between financial reporting quality index and reporting tone.Research limitations/implicationsOverall, this paper provides baseline evidence for future research and policy making and reveals that ACs reporting what they have done increases transparency and impacts on reporting quality.Practical implicationsOverall, this paper suggests that the tone of AC reports seems to convey information that affects the communication function of AC reporting and thereby helps to improve reporting quality.Originality/valueThough the importance of AC disclosures in improving reporting quality is well recognised in policy guidelines and governance recommendations, no study has employed computer-based textual analysis of AC reports and investigated the effect of AC disclosure tone and the role it can play in achieving higher reporting quality.

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