An Empirical Analysis of the Effects of Accounting Expertise in Audit Committees on Non-GAAP Earnings Exclusions

2013 ◽  
Vol 28 (1) ◽  
pp. 17-37 ◽  
Author(s):  
Ananth Seetharaman ◽  
Xu (Frank) Wang ◽  
Sanjian (Bill) Zhang
Keyword(s):  
Empirical Analysis ◽  
Audit Committee ◽  
Financial Information ◽  
Data Availability ◽  
Audit Committees ◽  
Stock Exchanges ◽  
Financial Measures ◽  
Accounting Expertise ◽  
Jel Classifications

SYNOPSIS U.S. stock exchanges and lawmakers rely on audit committees to help safeguard the accuracy and reliability of corporate GAAP and non-GAAP financial information. However, there are gaps in our knowledge of how audit committees perform, especially with respect to companies' non-GAAP financial information. Unlike companies' GAAP-based financial measures, non-GAAP numbers are voluntary, not well defined, and unaudited. Non-GAAP measures thus provide a particularly rich setting to examine the efficacy of audit committee performance. In this study we examine the association between audit committee appointments of accounting experts (relative to appointments of nonaccounting experts) and the company's non-GAAP earnings numbers. We find a larger decline in non-GAAP earnings exclusions following the appointment of accounting (rather than nonaccounting) experts to audit committees. We also find that accounting experts are associated with higher-quality post-appointment non-GAAP earnings exclusions. JEL Classifications: M4; G30. Data Availability: Data are available from the sources indicated in the paper.

Determinants and Consequences of Quantitative Critical Accounting Estimate Disclosures

2019 ◽  
Vol 94 (5) ◽  
pp. 189-218 ◽  
Author(s):  
Matthew Glendening ◽  
Elaine G. Mauldin ◽  
Kenneth W. Shaw
Keyword(s):  
Audit Committee ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Financial Reports ◽  
The Public ◽  
Estimation Uncertainty ◽  
Earnings Surprises ◽  
Accounting Expertise ◽  
Insight Into ◽  
Jel Classifications

ABSTRACT The Securities and Exchange Commission (SEC) recommends that firms provide MD&A disclosures quantifying the earnings effect of reasonably likely changes in critical accounting estimates (quantitative CAE). This paper examines the determinants and consequences of quantitative CAE. We find that quantitative CAE are negatively associated with management's incentives to misreport (proxied by portfolio vega) and positively associated with audit committee accounting expertise and with audit offices with multiple quantitative CAE clients. These findings hold for the presence, initiation, number, and magnitude of quantitative CAE, and for both pension and non-pension quantitative CAE. We also find that incidences of AAERs, misstatements, and small positive earnings surprises decrease after initiation of quantitative CAE. Collectively, our findings provide insight into the use of quantitative disclosure to inform users about accounting estimation uncertainty in financial reports. JEL Classifications: M41; M42; M48. Data Availability: Data are available from the public sources cited in the text.

Auditors' Communications with Audit Committees: The Influence of the Audit Committee's Oversight Approach

2018 ◽  
Vol 38 (2) ◽  
pp. 125-150 ◽  
Author(s):  
Krista Fiolleau ◽  
Kris Hoang ◽  
Bradley Pomeroy
Keyword(s):  
Audit Committee ◽  
Level Of Detail ◽  
Data Availability ◽  
Audit Committees ◽  
Communication Style ◽  
Quality Audit ◽  
Resolution Process ◽  
Asking Questions

SUMMARY Policymakers have identified effective communications between the auditor and the audit committee (AC) as an indicator of a quality audit, but little is known about the factors auditors consider when deciding what to communicate about significant accounting issues. We propose auditors use the AC's oversight approach as a cue for the level of detail in their communications that is necessary to satisfy the AC's preferences for auditors' insights on issues that were resolved with management. In our experiment, auditors resolved an inventory obsolescence issue with a hypothetical CFO, and then wrote a communication about it for the AC. We manipulate the AC's preference for getting involved in the issue resolution process and its reputation for asking questions. Our results, supplemented by findings from audit partner interviews, suggest auditors tailor their communications to the AC's oversight approach, the AC's industry and accounting knowledge, and the AC chair's preferred communication style. Data Availability: Contact the authors.

Audit Committee Incentives and the Resolution of Detected Misstatements

2015 ◽  
Vol 34 (4) ◽  
pp. 109-137 ◽  
Author(s):  
Marsha B. Keune ◽  
Karla M. Johnstone
Keyword(s):  
Audit Committee ◽  
Positive Association ◽  
Stock Option ◽  
Economic Incentives ◽  
Data Availability ◽  
Audit Committees ◽  
Analyst Forecast ◽  
Agency Conflicts ◽  
Option Compensation ◽  
Stock Option Compensation

SUMMARY We investigate the role of audit committee economic incentives in judgments involving the resolution of detected misstatements. The results reveal a positive association between audit committee short-term stock option compensation and the likelihood that managers are allowed to waive income-decreasing misstatements that, if corrected, would have caused the company to miss its analyst forecast. Complementary results reveal a positive association between the audit committee long-term stock option compensation and the likelihood that managers are allowed to waive income-increasing misstatements when the company reports just missing, meeting, or beating its analyst forecast. These findings illustrate agency conflicts that can arise when compensating audit committees with options. We obtain these results while controlling for CEO option compensation and audit committee characteristics, along with indicators of corporate governance, auditor incentives, and company characteristics. Data Availability: Data used in the study are available from public sources

scholarly journals Corporate Social Responsibility, Audit Committee Expertise, and Financial Reporting: Empirical Evidence from Korea

2021 ◽  
Vol 13 (19) ◽  
pp. 10517
Author(s):  
Haeyoung Ryu ◽  
Soo-Joon Chae ◽  
Bomi Song
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Financial Reporting ◽  
Audit Committee ◽  
Earnings Quality ◽  
Audit Committees ◽  
Accounting Expertise ◽  
Corporate Social

Corporate social responsibility (CSR) involves multiple activities and is influenced by the cultural and legal environment of the country in which a firm is located. This study examines the role of audit committees’ (AC) financial expertise in the relationship between CSR and the earnings quality of Korean firms with high levels of CSR. Using a multivariate analysis, it investigates whether the ACs that include members with accounting expertise, finance expertise, or supervisory expertise individually affect a firm’s decision making. It also examines how ACs with diverse expertise contribute toward improving the financial reporting quality of firms with high levels of CSR. The results demonstrate that when there is a certified accountant in the AC of a firm that practices CSR based on ethical motivation, the earnings management through discretionary accruals is more strictly controlled. This is more effective when the AC comprises members with accounting and non-accounting expertise. This finding implies that the AC plays a positive role in improving the accounting information quality of firms with CSR excellence. Moreover, while the role of accounting experts in the AC is important for maintaining high earnings quality, combining other types of expertise creates synergy.

Audit Committee Accounting Expertise and the Mitigation of Strategic Auditor Behavior

2020 ◽  
Author(s):  
James Hansen ◽  
Ling Lei Lisic ◽  
Timothy A. Seidel ◽  
Michael S. Wilkins
Keyword(s):  
Audit Committee ◽  
Market Competition ◽  
Legal Liability ◽  
Audit Committees ◽  
Credence Goods ◽  
Professional Regulation ◽  
Audit Market ◽  
Big 4 ◽  
Material Weaknesses ◽  
Accounting Expertise

Our study is motivated by the theory of credence goods in the auditing setting. We propose that audit committee accounting expertise should reduce information asymmetries between the auditor and the client, thereby limiting auditors' ability to over-audit and under-audit. Consistent with this notion, our results indicate that when audit committees have accounting expertise, clients (1) pay lower fees when changes in standards decrease required audit effort; (2) pay a smaller fee premium in the presence of remediated material weaknesses; and (3) have a reduced likelihood of restatement when audit market competition is high. Our findings in the under-auditing setting generally are strongest among non-Big 4 engagements, consistent with non-Big 4 auditors being less sensitive to market-wide disciplining mechanisms such as reputation, legal liability, and professional regulation. We also provide evidence that the nature of audit committee members' accounting expertise differentially impacts the committee's ability to curtail over- and under-auditing.

Who's Really in Charge? Audit Committee versus CFO Power and Audit Fees

2014 ◽  
Vol 89 (6) ◽  
pp. 2057-2085 ◽  
Author(s):  
Matthew J. Beck ◽  
Elaine G. Mauldin
Keyword(s):  
Audit Committee ◽  
Economic Recession ◽  
Audit Fees ◽  
Auditor Independence ◽  
Negotiation Process ◽  
Data Availability ◽  
Audit Committees ◽  
Exogenous Shock ◽  
Cast Doubt ◽  
Recent Financial Crisis

ABSTRACT Although regulation makes audit committees responsible for determining and negotiating audit fees, researchers and practitioners express concerns that CFOs continue to control these negotiations. Thus, regulation may give investors a false sense of security regarding auditor independence. We utilize the recent financial crisis and economic recession as an exogenous shock that allows us to shed light on the relative influence of the audit committee and the CFO on fee negotiations. During the recession, we find larger fee reductions in the presence of more powerful CFOs, and smaller fee reductions in the presence of more powerful audit committees. We also find the CFO or the audit committee primarily influences fees when their counterpart is less powerful. Our findings suggest a more complex relationship between the CFO and the audit committee than current regulations recognize and cast doubt on the ability of regulation to force one structure on the negotiation process. Data Availability: Data are available from public sources identified in the text.

scholarly journals Does Audit Committee Characteristics Promote Risk Management Practices in Nigerian Listed Firms?

2021 ◽  
Vol 10 (2) ◽  
pp. 70
Author(s):  
Stephen A. Ojeka ◽  
Alex Adeboye ◽  
Olajide Dahunsi
Keyword(s):  
Risk Management ◽  
Board Of Directors ◽  
Audit Committee ◽  
Financial Risk ◽  
Enterprise Risk Management ◽  
Audit Committees ◽  
Listed Firms ◽  
Enterprise Risk ◽  
The Board Of Directors ◽  
Accounting Expertise

There has been a huge and deluge of risk threatening industries at an unequalled magnitude in recent times. As such, the board of directors and senior executives are increasingly expected to manage their various organizations' risk portfolios, affecting their financial performance. This has led to the assigning of the risk assessment role to the audit committee. The board of directors and its audit committee play an essential function in Enterprise Risk Management (ERM) by building up the right condition or tone-at-the-top. Given the board's responsibilities for representing the interests of shareholders, it plays a vital role in overseeing management's approach to ERM. This study examined the relationship between audit committee characteristics and risk management of some selected listed firms in a developing country like Nigeria. The study used secondary data to describe the dependent variable (financial risk decomposed into credit risk and liquidity risk) and the explanatory variables (decomposed into audit committee accounting expertise, audit committee meetings, audit committee independence and audit committee gender). The study used pair sample t-test, student t-test, Pearson Moment Correlation and random panel data estimator for twenty (20) selected listed firms for 2012-2016. Findings indicate that there is a negative between audit committee accounting expertise and financial risk. This revealed that Accounting Expertise in Audit Committees are likely to involve in activities and practices to curb financial risk. In addition, the Audit committee meeting indicates a negative relationship with credit risk. Audit committee gender and audit committee independence have a negative effect on liquidity risk. Therefore, this study recommends that Audit committees embrace Enterprise Risk Management (ERM) to manage risks effectively across the organization. Risk management processes should be one of the major points of discussion during audit committee meetings.

scholarly journals Do Gender Diversity Recommendations in Corporate Governance Codes Matter? Evidence from Audit Committees

2020 ◽  
Vol 39 (1) ◽  
pp. 173-197 ◽  
Author(s):  
Nigar Sultana ◽  
Steven F. Cahan ◽  
Asheq Rahman
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Gender Diversity ◽  
Positive Association ◽  
Data Availability ◽  
Audit Committees ◽  
Women Directors ◽  
Corporate Governance Codes ◽  
Limited Supply ◽  
The Impact

SUMMARY Motivated by two opposing views, the limited supply view and the discrimination view, we examine the impact of gender diversity guidelines on the strength of the association between the presence of female audit committee members and audit quality. The limited supply view predicts that the effect of female audit committee members on audit quality would decrease after the guidelines were issued because they increased the demand for women directors without a commensurate increase in the supply of qualified women directors. The discrimination view predicts this relation would increase after the guidelines were issued since some firms would have abandoned their suboptimal hiring practices that favored men over better qualified women, resulting in higher quality firm-director matches as opportunities for women increase. Consistent with the limited supply view, we find that the positive association between audit committee gender diversity and audit quality weakened after gender diversity guidelines were introduced in Australia. JEL Classifications: G38; M42; M48. Data Availability: Data are available from the databases cited in the text.

scholarly journals Audit committees in West Indian states

2007 ◽  
Vol 3 (1) ◽  
pp. 18-33
Author(s):  
Anthony R. Bowrin
Keyword(s):  
Audit Committee ◽  
Stock Exchange ◽  
West Indian ◽  
Audit Committees ◽  
Stock Exchanges ◽  
Financial Industry ◽  
Publicly Traded ◽  
Indian States ◽  
Publicly Traded Companies ◽  
Industry Affiliation

This study describes the regulatory framework governing audit committees (AC) of publicly traded companies in the West Indies and examines the extent to which the provisions of these AC regulations are similar to the International Federation of Accountants guidelines for AC. Also, it examines the actual AC policies of publicly traded West Indian firms and determines whether they vary systematically with industry affiliation or firm size. The sample comprised companies traded on Barbados, Jamaica Stock Exchange, and Trinidad and Tobago Stock Exchanges in 2002. Larger companies and those in the financial industry provided better audit committee disclosures than their smaller counterparts and those in non-financial industries.

Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor?

2012 ◽  
Vol 88 (1) ◽  
pp. 297-326 ◽  
Author(s):  
Vic Naiker ◽  
Divesh S. Sharma ◽  
Vineeta D. Sharma
Keyword(s):  
Audit Committee ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Future Research ◽  
Corporate Boards ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Nonaudit Services

ABSTRACT: To address potential threats to auditor independence, the Sarbanes-Oxley Act of 2002 (SOX) requires the audit committee to pre-approve nonaudit services (NAS) procured from the auditor. However, the presence of a former audit firm partner (FAP) affiliated with the current auditor on the audit committee could undermine the audit committee's due diligence over the NAS pre-approval process. To alleviate such concerns, the Securities and Exchange Commission approved a three-year “cooling-off” period for appointing audit firm alumni as independent directors. Our analyses show that the presence of both affiliated and unaffiliated FAPs on audit committees does not lead to greater NAS procured from the auditor; rather, FAPs reduce NAS procured from the auditor. Moreover, NAS decline significantly following the appointment of FAPs to the audit committee. Further tests suggest the three-year cooling-off period may not be warranted and deserves further investigation. Our study raises important implications for regulators, policy makers, corporate boards, and future research. Data Availability: Data are publicly available from sources identified in the text.

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