The Impact on Auditor Judgments of CEO Influence on Audit Committee Independence

2011 ◽  
Vol 30 (4) ◽  
pp. 129-147 ◽  
Author(s):  
Jeffrey R. Cohen ◽  
Lisa Milici Gaynor ◽  
Ganesh Krishnamoorthy ◽  
Arnold M. Wright
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Data Availability ◽  
Audit Committees ◽  
Undue Influence ◽  
Management Incentives ◽  
Auditor Judgments ◽  
The Impact ◽  
Selection Of

SUMMARY Despite the importance of audit committee independence in ensuring the integrity of the financial reporting process, recent research suggests that even when audit committees meet regulatory independence requirements, certain factors, such as undue influence by the CEO over the selection of the audit committee, may diminish the ability of its members to be substantively independent. This study investigates whether auditors consider CEO influence over audit committee independence when making audit judgments where management's incentives to manage earnings differ. In an experiment, we find that audit partners and managers waive a larger amount of a proposed audit adjustment when management's incentives for earnings management are low than when incentives are high. However, when management incentives are high, auditors are less likely to waive as much of an adjustment when the CEO has less influence over the audit committee's independence than when the CEO's influence is greater. In all, the results support our expectations that auditors consider CEO influence on audit committee independence in the resolution of contentious accounting issues. Data Availability: Contact the authors.

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.     

The Impact of Audit Committee Information Technology Expertise on the Reliability and Timeliness of Financial Reporting

2019 ◽  
Vol 95 (5) ◽  
pp. 23-56 ◽  
Author(s):  
Musaib Ashraf ◽  
Paul N. Michas ◽  
Dan Russomanno
Keyword(s):  
Information Technology ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Audit Committee ◽  
Data Availability ◽  
Audit Committees ◽  
Material Weaknesses ◽  
Other Information ◽  
High Quality Information ◽  
The Impact

ABSTRACT We examine whether information technology expertise on audit committees impacts the reliability and timeliness of financial reporting. We find a reduction in the likelihood of material restatement, a reduction in the likelihood of information technology-related material weaknesses (which account for 55 percent of all reported material weaknesses), and more timely earnings announcements at firms with audit committee information technology expertise. These findings are robust to controlling for a firm's other information technology attributes, as well as when using entropy balanced samples, and we mitigate endogeneity concerns with evidence that our findings hold in a subsample of firms that all possess overall high-quality information technology. Finally, a difference-in-differences analysis, inclusion of firm fixed effects, and a falsification test largely support our assertion that the quality of financial reporting is significantly improved by the presence of an audit committee information technology expert. JEL Classifications: M41; M15. Data Availability: All data used in the study are publicly available.

The Interplay of Client Management and the Audit Committee on Auditor Performance

2016 ◽  
Vol 10 (1) ◽  
pp. P11-P17
Author(s):  
J. Owen Brown ◽  
Velina K. Popova
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Positive Impact ◽  
Reporting Quality ◽  
Audit Committees ◽  
Auditor Judgment ◽  
Management Incentives ◽  
Evidence Evaluation ◽  
Auditor Judgments ◽  
Client Management

SUMMARY This article summarizes “The Interplay of Management Incentives and Audit Committee Communication on Auditor Judgment” (Brown and Popova 2016), which investigates the influence that client management and the audit committee have on auditor judgments and behavior. We find that additional, informal audit committee communication with the auditor, as directed under the recently issued Auditing Standard No. 16, Communications with Audit Committees, has a significant and positive impact on auditors' evidence evaluation and related judgments under certain conditions. Specifically, when client management has greater incentives to try to unduly influence the auditor, this additional communication has a significant, positive impact on auditors' evidence evaluation and related judgments. However, when client management is perceived as having lower incentives, management becomes more persuasive than the audit committee and is able to influence the auditors into accepting an aggressive, management-preferred accounting outcome. We discuss the implications of our findings for auditors, companies, and regulators who are interested in the role of corporate governance and, more specifically, the interrelationships required among management, the auditor, and the audit committee for enhancing financial reporting quality.

scholarly journals The Impact Of Audit Committees Personal Characteristics On Earnings Management: Evidence From China

2012 ◽  
Vol 28 (6) ◽  
pp. 1331-1344 ◽  
Author(s):  
Baolei Qi ◽  
Gaoliang Tian
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Personal Characteristics ◽  
Audit Committees ◽  
Publicly Traded ◽  
Upper Echelons Theory ◽  
Gender Education ◽  
The Impact

This study investigates the influence of audit committees personal characteristics on the firms earnings management behavior using Chinas publicly traded firms during 2004-2010. Overall, our findings suggest that audit committees several personal characteristics, such as age, gender, education level, and working experience, are associated with earnings management, which in turn may affect the quality of financial reporting. The results are robust after controlling the size, independence, meeting frequency of audit committee, and other firm specific characteristics. The results are consistent with the predictions based on the Upper Echelons Theory. The contributions to the earnings management literature and implications for regulators and investors are also discussed.

The Audit Committee: Management Watchdog or Personal Friend of the CEO?

2013 ◽  
Vol 89 (1) ◽  
pp. 113-145 ◽  
Author(s):  
Liesbeth Bruynseels ◽  
Eddy Cardinaels
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Social Ties ◽  
Data Availability ◽  
Audit Committees ◽  
Sarbanes Oxley ◽  
Negative Effect

ABSTRACT To ensure that audit committees provide sufficient oversight over the auditing process and quality of financial reporting, legislators have imposed stricter requirements on the independence of audit committee members. Although many audit committees appear to be “fully” independent, anecdotal evidence suggests that CEOs often appoint directors from their social networks. Based on a 2004 to 2008 sample of U.S.-listed companies after the Sarbanes-Oxley Act, we find that these social ties have a negative effect on variables that proxy for oversight quality. In particular, we find that firms whose audit committees have “friendship” ties to the CEO purchase fewer audit services and engage more in earnings management. Auditors are also less likely to issue going-concern opinions or to report internal control weaknesses when friendship ties are present. On the other hand, social ties formed through “advice networks” do not seem to hamper the quality of audit committee oversight. Data Availability: All data are publicly available from sources identified in the text.

Audit committee effectiveness and financial reporting timeliness

2018 ◽  
Vol 9 (1) ◽  
pp. 34-55 ◽  
Author(s):  
Ahmed Atef Oussii ◽  
Neila Boulila Taktak
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Emerging Market ◽  
Listed Companies ◽  
Audit Committees ◽  
Future Research ◽  
Governance System ◽  
Content Type ◽  
Financial Expertise ◽  
The Impact

Purpose The purpose of this paper is to investigate whether there is any relationship between the effectiveness of an audit committee and the financial reporting timeliness of Tunisian listed companies as proxied by external audit delay (AD). Analysis focuses on five audit committee characteristics: authority, financial expertise, independence, size and diligence. Design/methodology/approach Empirical tests address 162 firm-year observations drawn from Tunisian listed companies during 2011-2013. Findings Multivariate analyses indicate that audit committees with members who have financial expertise are significantly associated with shorter AD. Thus, the results suggest that audit committee financial expertise contributes to the improvement of financial statements’ timeliness. Research limitations/implications The audit committee attributes examined in this study were based on DeZoort et al. (2002) framework. There could be other aspects of audit committee effectiveness such as audit committee tenure and audit committee chair characteristics, which were not addressed in the present study. Thus, future research may consider and examine these other components of audit committee effectiveness. Practical implications Findings have managerial implications. Companies can re-look into how to further improve audit committee composition in order to enhance the timeliness of financial reporting. The issues of audit committee effectiveness and timely reporting also affect regulators and policy makers since they need to play a role in the establishment of effective audit committees and the improvement of financial reporting timeliness. Originality/value This study is one of few that have examined the impact of audit committee effectiveness on ADs in an emerging market country. Findings lend credence to the belief that audit committee members’ financial expertise enhances the quality of financial reporting by firms in a North African market criticized for the lack of maturity of its corporate governance system (Klibi, 2015; Fitch Ratings, 2009).

The role of audit committees in mitigating earnings management: evidence from Jordan

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Taha Almarayeh ◽  
Modar Abdullatif ◽  
Beatriz Aibar-Guzmán
Keyword(s):  
Developing Countries ◽  
Earnings Management ◽  
Audit Committee ◽  
Discretionary Accruals ◽  
Least Square ◽  
Audit Committees ◽  
Institutional Setting ◽  
Content Type ◽  
The Impact

PurposeThis study examines the relationship between audit committees (ACs) and earnings management (EM) in the developing country context of Jordan. In particular, it investigates whether audit committee attributes, including their size, independence, expertise and meetings, are able to restrict discretionary accruals as a proxy for EM.Design/methodology/approachThe generalized least square (GLS) regression was used to study the association between audit committee attributes and discretionary accruals, as a proxy of EM, for a sample of industrial firms listed on the Amman Stock Exchange (ASE) during the period 2012–2020. Data were obtained from the firms' annual reports.FindingsThe regression results indicate that audit committee independence is the only audit committee attribute that seems to improve the effectiveness of ACs, in that it is significantly associated with less EM, while other audit committee attributes that were tested do not show statistically significant associations.Research limitations/implicationsIn emerging markets, like Jordan, ACs may not be an efficient monitoring mechanism; therefore, it can be argued that the prediction made by the agency theory about the role of ACs in mitigating opportunistic EM activities does not necessarily apply to all contexts.Practical implicationsA better understanding of audit committee effectiveness in developing countries could help regulators in these countries assess the impact of planned corporate governance (CG) reforms and to better monitor and enhance the performance of ACs.Social implicationsIn a setting characterized by closely held companies, high power distance and low demand for high-quality CG mechanisms, this study contributes to understanding how this business system operates, and how improving CG mechanisms could be successful in such cultures.Originality/valueThis study investigates the under-researched relationship between audit committee characteristics and EM in developing countries. In so doing, it aims to provide new insights into this relationship within the developing context case of Jordan, including if and how the institutional setting influences this relationship.

scholarly journals Audit committee quality and audit report lag: the role of mandatory adoption of IFRS in Saudi companies

Accounting ◽  
2021 ◽  
pp. 167-178
Author(s):  
Mahfod Mobarak Aldoseri ◽  
Nasr Taha Hassan ◽  
Magdy Melegy Abd El Hakim Melegy
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Audit Committees ◽  
Strong Impact ◽  
Audit Report ◽  
Before And After ◽  
Mandatory Adoption ◽  
The Impact ◽  
Weak Influence

This paper aims to examine the effect of audit committee characteristics on audit report lag, and also explores whether this effect will vary between before and after mandatory adoption of IFRS in Saudi listed companies. Based on a Saudi sample of 388 firm-year observations from 2015 to 2018, the Poisson regression analysis shows that among audit committee characteristics, only audit committee financial experience significantly influences the timing of financial reporting. The result indicates a weak influence of audit committees on timeliness of financial reporting, which is consistent with the results of most of previous studies. On the other hand, the results show a strong impact of the adoption of IFRS on the context of that relationship, where the results show the impact of IFRS on audit report lag, audit committee quality and the association between them.

scholarly journals Earnings management, audit committee effectiveness and the role of blockholders ownership: Evidence from UK large firms

2012 ◽  
Vol 1 (4) ◽  
pp. 100-116 ◽  
Author(s):  
Murya Habbash
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Family Firms ◽  
Agency Problems ◽  
Audit Committees ◽  
Effective Control ◽  
Agency Conflicts ◽  
Controlling Shareholders

The existing literature documents that the quality of financial reporting is higher when firms have effective audit committees. However, recent studies find that audit committees are not effective in family firms where agency conflicts arise between controlling and non-controlling shareholders. This study extends the previous findings by investigating the effectiveness of audit committees in firms with similar agency conflicts when one owner obtains effective control of the firm. Compared to firms with a low level of block ownership, high-blockholder firms face less agency problems due to the separation of ownership and management, but more severe agency problems between controlling (blockholders) and non-controlling shareholders (minority shareholders). Using a unique hand-collected sample, this study tests the largest 350 UK firms for three years from 2005 to 2007, and shows that firms with effective audit committees have less earnings management. This study also documents that the monitoring effectiveness of audit committees is moderated in firms with high blockholder ownership. The results are not sensitive to the endogeneity test and hold for alternative specifications of both dependent and independent variables. Overall, these findings suggest that audit committees are ineffective in mitigating the majority-minority conflict compared to their effectiveness in reducing owners-managers conflicts. These conclusions, along with some recent similar evidence (e.g., Rose, 2009 and Guthrie and Sokolowsky, 2010), may raise doubts about the monitoring role of blockholders asserted by agency theorists and widely accepted in corporate governance literature.

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.

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