Audit Committee Member Support for Proposed Audit Adjustments: Pre-SOX versus Post-SOX Judgments

2008 ◽  
Vol 27 (1) ◽  
pp. 85-104 ◽  
Author(s):  
F. Todd DeZoort ◽  
Dana R. Hermanson ◽  
Richard W. Houston
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Audit Committees ◽  
Future Research ◽  
Reporting Accuracy ◽  
Sarbanes Oxley ◽  
Public Company

This study examines differences in audit committee member judgments before the Sarbanes-Oxley Act (“pre-SOX”) versus after the act was passed (“post-SOX”) as well as audit committee member perceptions of the effects of SOX. Based on experimental materials administered to 372 public company audit committee members (131 pre-SOX from DeZoort et al. [2003a] and 241 post-SOX), we find that audit committee support for an auditor-proposed adjustment is significantly higher in the post-SOX period. Additional analyses reveal that the effect of SOX differs between audit committee members who are CPAs versus non-CPAs. Specifically, the greater audit committee member support for the proposed adjustment post-SOX is attributable to members who are CPAs. In general, audit committee members in the post-SOX period feel more responsible for resolving the accounting issue, perceive that audit committee members have greater expertise to evaluate the accounting issue, and also are more concerned with reporting accuracy and a need for conservative financial reporting than those in the pre-SOX period. We also find that post-SOX respondents who support the auditor's proposed adjustment have more favorable views of the benefits of SOX, and they believe more strongly that audit committees in the post-SOX period are more conservative and have more power than they did pre-SOX. We discuss implications and avenues for future research.

scholarly journals Characteristics Of Diligent Audit Committees

2012 ◽  
Vol 10 (4) ◽  
pp. 191 ◽  
Author(s):  
Mike Braswell ◽  
Roger B. Daniels ◽  
Mark Landis ◽  
Chun-Chia (Amy) Chang
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Agency Cost ◽  
Audit Committees ◽  
Efficiency Gains ◽  
Firm Level ◽  
Sarbanes Oxley ◽  
Financial Expertise ◽  
Composition Characteristics

The mounting attention given to audit committees following a series of corporate financial reporting failures has resulted in numerous provisions within Sarbanes Oxley Act (SOX hereafter) of 2002. The SOX addresses aspects of the audit committee, including its authority and composition characteristics, but the requirement for minimum meeting frequency for the audit committee member was absent from the final SOX provision despite the recommendations of regulators. Since audit committee activity, or degree of audit committee diligence, is determined by the audit committee itself, we investigate various firm-level and governance attributes that likely influence audit committees choice to meet more often than anticipated. After analyzing a sample of 2,715 firm-year observations spanning fiscal years 1998-2003, we find that audit committee diligence is positively associated with audit committee attributes such as financial expertise, but negatively association with audit committee tenure, suggesting that efficiency gains are enjoyed by audit committees as they become more familiar with firm-specific reporting issues. We also document positive associations between audit committee diligence and both governance and agency cost variables. Finally, we document a significant increase in audit committee diligence in the years following the implementation of the SOX 2002 provisions.

Does Audit Firm Tenure Matter to Audit Committee Members? Evidence from an Accounting Dispute

2018 ◽  
Vol 33 (2) ◽  
pp. 25-41 ◽  
Author(s):  
Janice E. Rummell ◽  
F. Todd DeZoort ◽  
Dana R. Hermanson
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Audit Firm ◽  
Big 4 ◽  
Analyst Expectations ◽  
Public Company ◽  
Management Experience ◽  
Support Relation

SYNOPSIS This study examines the effects of Big 4 audit firm tenure on audit committee member support for the auditor in an auditor/management dispute over a subjective accounting issue. One hundred eighteen U.S. public company audit committee members participated in an experiment with audit firm tenure (short/long) manipulated randomly between subjects. The results indicate that participants in the long audit firm tenure group provide more support for the auditor in the dispute than participants in the short tenure group. Audit committee support for the auditor is positively related to audit committee member experience and CPA status, as well as perceived management pressure to meet analyst expectations, but negatively related to perceived management experience in financial reporting. Finally, audit committee members' perceptions of audit firm reliability (i.e., credibility and dependability) mediate the audit firm tenure-auditor support relation. Overall, our results suggest enhanced audit committee support for longer-tenured auditors.

Did the 1999 NYSE and NASDAQ Listing Standard Changes on Audit Committee Composition Benefit Investors?

2017 ◽  
Vol 92 (6) ◽  
pp. 187-212 ◽  
Author(s):  
Seil Kim ◽  
April Klein
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Research Question ◽  
Reporting Quality ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Difference In Differences ◽  
Listed Firms ◽  
Sarbanes Oxley ◽  
Independent Audit

ABSTRACT In December 1999, the SEC instituted a new listing standard for NYSE and NASDAQ firms. Listed firms were now required to maintain fully independent audit committees with at least three members. In July 2002, the U.S. Congress legislated these standards through the Sarbanes-Oxley Act. Our research question is whether all investors benefited from the 1999 new rule. Using both an event study and a difference-in-differences methodology, we find no evidence of higher market value or better financial reporting quality resulting from this rule.

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).

Corporate Governance Factors and Auditor Going Concern Assessments

2005 ◽  
Vol 4 (3) ◽  
pp. 5-29 ◽  
Author(s):  
Susan Parker ◽  
Gary F. Peters ◽  
Howard F. Turetsky
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Financial Distress ◽  
Audit Committee ◽  
Future Research ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Auditing Standards ◽  
Distressed Firms ◽  
The Impact

When making going concern assessments, Statement on Auditing Standards No. 59 (Auditing Standards Board 1988) directs auditors to consider the nature of management's plans and ability to mitigate periods of financial distress successfully. Corporate governance factors reflect attributes of control, oversight, and/or support of management's plans and actions intended to overcome financial distress. Correspondingly, this study investigates the impact of certain corporate governance factors on the likelihood of a going concern modification. Using survival analysis techniques, we examine a sample of 161 financially distressed firms for the time period 1988–1996. We find that auditors are twice as likely to issue a going concern modification when the CEO is replaced. We also find that going concern modifications are inversely associated with blockholder ownership. We also confirm Carcello and Neal's (2000) findings with respect to the association between an independent audit committee and an increased likelihood of modification. In a repeated events setting, we find that insider ownership and board independence are inversely associated with repeated going concern modifications. Our study concludes by proposing implications for the current financial reporting environment (including the Sarbanes‐Oxley Act of 2002) and future research avenues.

Auditor Communications with the Audit Committee and the Board of Directors: Policy Recommendations and Opportunities for Future Research

2007 ◽  
Vol 21 (2) ◽  
pp. 165-187 ◽  
Author(s):  
Jeffrey Cohen ◽  
Lisa Milici Gaynor ◽  
Ganesh Krishnamoorthy ◽  
Arnold M. Wright
Keyword(s):  
Financial Reporting ◽  
Boards Of Directors ◽  
Audit Committee ◽  
Academic Research ◽  
Reporting Quality ◽  
Academic Community ◽  
Communication Process ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Future Research

To contribute to the Public Company Accounting Oversight Board (PCAOB) project on auditor communications with audit committees and boards of directors, we present in this paper a review of relevant academic literature. We also identify promising future research opportunities for the academic community. We specifically focus on how the communication process may affect overall financial reporting quality, internal controls, control environments, and external auditors' performance, as well as matters that potentially impact financial reporting and should interest the PCAOB (e.g., in the area of management discussion and analysis). We specifically link the findings from academic research to the discussion questions posed by the PCAOB in its 2004 briefing paper. Several potential implications of the findings should also interest standard-setters and regulators addressing issues related to corporate governance and financial reporting quality.

The Effects of Corporate Governance Experience and Financial-Reporting and Audit Knowledge on Audit Committee Members' Judgments

2001 ◽  
Vol 20 (2) ◽  
pp. 31-47 ◽  
Author(s):  
F. Todd DeZoort ◽  
Steven E. Salterio
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Audit Committees ◽  
Corporate Management ◽  
Senior Member ◽  
Conflict Situations ◽  
Ability Tests ◽  
Board Director

Interest in audit committees as part of overall corporate governance has increased dramatically in recent years, with a specific emphasis on member independence, experience, and knowledge. This paper reports the results of a study investigating whether audit committee members' corporate governance experience and financial-reporting and audit knowledge affect their judgments in auditor-corporate management conflict situations. A sample of 68 audit committee members completed an accounting policy dispute case and several knowledge and ability tests. The results indicate that, as expected, greater independent director experience and greater audit knowledge was associated with higher audit committee member support for an auditor who advocated a “substance over form” approach in the dispute with client management. Conversely, concurrent experience as a board director and a senior member of management was associated with increased support for management. Collectively, these findings have a number of implications for practice and research. The results provide justification for calls that audit committees be composed completely of independent directors. The results also support auditor concerns that varying knowledge levels lead to systematic differences in audit committee member judgments in disputes between auditors and management.

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.

Auditors' Internal Control over Financial Reporting Decisions: Analysis, Synthesis, and Research Directions

2012 ◽  
Vol 32 (Supplement 1) ◽  
pp. 131-166 ◽  
Author(s):  
Stephen K. Asare ◽  
Brian C. Fitzgerald ◽  
Lynford E. Graham ◽  
Jennifer R. Joe ◽  
Eric M. Negangard ◽  
...  
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Future Research ◽  
The Public ◽  
Road Map ◽  
Sarbanes Oxley ◽  
Environmental Attributes ◽  
Public Company ◽  
Reporting Decisions ◽  
Five Phases

SUMMARY We synthesize the literature on auditors' evaluation of, and reporting on, internal control over financial reporting (ICOFR), as required by the Sarbanes-Oxley Act. The purpose of the synthesis is (1) to provide information on how and how well auditors perform the task, which serves as feedback to the Public Company Accounting Oversight Board on implementation issues and problems related to auditors' application of the professional standards on ICOFR; and (2) to identify gaps in the current literature and fruitful areas of future research. Consistent with Auditing Standard No. 5, we delineate five phases of the ICOFR audit: (1) planning; (2) scoping; (3) testing; (4) evaluation; and (5) reporting. We structure our synthesis using a framework that classifies the determinants of performance in each phase into five broad areas: (a) the auditor's attributes, (b) the client's attributes, (c) the interaction between the auditor and the client, (d) task attributes, and (e) environmental attributes. Key contributions include providing an ICOFR tasks taxonomy, proposing a model of the determinants of performance for each task, evaluating auditors' performance of the tasks in our taxonomy, highlighting findings and gaps of importance to regulators, and providing a road map for future research.

Audit Committee Member Investigation of Significant Accounting Decisions

2010 ◽  
Vol 29 (1) ◽  
pp. 173-205 ◽  
Author(s):  
Bradley Pomeroy
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Negotiation Process ◽  
Future Research ◽  
Reporting Process ◽  
Governance Practice ◽  
Corporate Governance Practice ◽  
Available Information ◽  
Probing Questions

SUMMARY: In the post-Enron environment, audit committee (AC) members are under increased scrutiny to demonstrate effectiveness in resolving significant accounting issues. However, prior research suggests that AC members are not involved in material auditor-client negotiations and that they are often not adequately informed of the issue resolution process. Therefore, AC members may not be effective in their oversight of the financial reporting process unless an accounting decision is clearly aggressive or adequate information about the decision is provided. In this study, I examine AC members’ investigation of accounting decisions when they are (or not) adequately informed of the negotiation process that led to the decision and when the decision results in an aggressive (versus conservative) financial reporting outcome. The hypotheses are developed from social psychology and research on corporate governance practice suggesting that AC members investigate accounting decisions to reduce discomfort in the financial reporting process by asking probing questions of the auditors and management. The results indicate that negotiation knowledge increases AC discomfort but has no effect on AC investigation, perhaps because potential questions were adequately addressed by the available information. I also find that AC members investigate more extensively as accounting decisions become increasingly aggressive and AC members with accounting experience are particularly thorough in their investigations when accounting decisions are aggressive. The results of this research have important implications to practice and future research.

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