Enhancing Perceived and Actual Audit Committee Effectiveness through Financial Expert Certification

SUMMARY: The purpose of this paper is to generate and inform academic, practitioner, and regulatory discussion on means to promote perceived and actual audit committee effectiveness. As one potential method, we propose that the SEC initiate a CPE-driven certification program for audit committee members designated as financial experts. Our proposal addresses many of the challenges that post-SOX audit committees face (cf. Beasley et al. 2009; Cohen et al. 2010) by emphasizing their oversight role, sharing audit committee best practices, enhancing the accountabilities of external auditors, and sending a strong signal to stakeholders that the audit committee owns the audit process.

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Strategic Audit Inquiry: The Impact of Timing and the Promotion of Statutory Protections on Client Fraud Disclosures

Accounting Horizons ◽

10.2308/horizons-18-101 ◽

2020 ◽

Vol 34 (3) ◽

pp. 153-167

Author(s):

John R. Lauck ◽

Stephen J. Perreault ◽

Joseph R. Rakestraw ◽

James S. Wainberg

Keyword(s):

Best Practices ◽

Audit Quality ◽

Self Regulation ◽

Data Availability ◽

Audit Committees ◽

External Auditors ◽

Extant Literature ◽

Psychological Theories ◽

Inquiry Process ◽

The Impact

SYNOPSIS Auditing standards require external auditors to inquire of client-employees regarding their knowledge of actual or suspected fraud (PCAOB 2010b; AICPA 2016). However, the extant literature provides little guidance on practical methods that auditors can employ to increase the likelihood of fraud disclosure and improve audit quality. Drawing upon best practices in the whistleblowing literature and psychological theories on self-regulation, we experimentally test the efficacy of two practical strategies that auditors can employ during the fraud inquiry process: actively promoting statutory whistleblower protections and strategically timing their fraud inquiries. Our results indicate that auditors are more likely to elicit client-employee fraud disclosures by actively promoting statutory whistleblower protections and strategically timing the fraud inquiry to take place in the afternoon, when client-employee self-regulation is more likely to be depleted. These two audit inquiry strategies should be of considerable interest to audit practitioners, audit committees, and those concerned with improving audit quality. Data Availability: From the authors by request.

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Audit committee ownership and audit report lag: evidence from Australia

International Journal of Accounting and Information Management ◽

10.1108/ijaim-09-2018-0107 ◽

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.

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Gender diversity on audit committees and its impact on audit fees: evidence from India

Accounting Research Journal ◽

10.1108/arj-01-2018-0001 ◽

2019 ◽

Vol 32 (4) ◽

pp. 568-586 ◽

Cited By ~ 1

Author(s):

Seema Miglani ◽

Kamran Ahmed

Keyword(s):

Audit Committee ◽

Audit Quality ◽

Gender Diversity ◽

Audit Fees ◽

Ordinary Least Squares ◽

Audit Committees ◽

Women Directors ◽

Least Squares Regression ◽

Content Type ◽

Financial Expert

Purpose The purpose of this study is to examine the relationship existing between gender diverse (women directors) audit committees and audit fees. Design/methodology/approach The authors use a sample of 200 listed Indian firms over a four-year period (2011-2014). Ordinary least squares regression is used to assess whether and how the presence of women directors on audit committees affects the fee paid to the external auditor in India. To deal with the self-selection bias, the authors use a two-stage model developed using Heckman’s (1976) method. Findings The results show a significant positive relationship between the presence of a woman financial expert on the audit committee and audit fees after controlling for a number of firm-specific and governance characteristics and potential endogeneity with the propensity-matching score analysis. From the demand-side perspective of audit pricing, the results indicate that women financial experts on audit committees increase the need for assurance provided by external auditors. Using interaction terms, the authors find that women with financial expertise on an audit committee have a stronger association with audit fees as entity becomes more complex. Research limitations/implications The findings suggest that audit committees with women financial experts are likely to demand higher audit quality, ceteris paribus. Practical implications Gender of the financial expert is critical to the audit committee’s effectiveness. The findings of this study have implications for the composition of an audit committee in a firm. Originality/value This study contributes to the extant literature by examining the less-researched topic of the association between the women representation on audit committees and audit fees. It also offers further empirical evidence that will influence the debate on the importance of gender diversity in corporations.

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Does Internal Audit Function Quality Deter Management Misconduct?

The Accounting Review ◽

10.2308/accr-50871 ◽

2014 ◽

Vol 90 (2) ◽

pp. 495-527 ◽

Cited By ~ 69

Author(s):

Matthew S. Ege

Keyword(s):

Internal Control ◽

Audit Committee ◽

Internal Audit ◽

Audit Committees ◽

Regulatory Requirements ◽

Difference In Differences ◽

External Auditors ◽

Internal Audit Function ◽

Auditor Quality ◽

External Auditor

ABSTRACT Standard-setters believe high-quality internal audit functions (IAFs) serve as a key resource to audit committees for monitoring senior management. However, regulators do not enforce IAF quality or require disclosures relating to IAF quality, which is in stark contrast to regulatory requirements placed on boards, audit committees, and external auditors. Using proprietary data, I find that a composite measure of IAF quality is negatively associated with the likelihood of management misconduct even after controlling for board, audit committee, and external auditor quality. This result is robust to a variety of other specifications, including controlling for internal control quality and separate estimation during the pre- and post-SOX time periods. A difference-in-differences analysis indicates that misconduct firms have low IAF quality and competence during misconduct years and improve IAF quality and competence in the post-misconduct years. These findings suggest that regulators, audit committees, and other stakeholders should consider ways to improve IAF quality.

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Academic Research on Communications Among External Auditors, the Audit Committee, and the Board: Implications and Recommendations for Practice

Current Issues in Auditing ◽

10.2308/ciia.2008.2.1.a1 ◽

2008 ◽

Vol 2 (1) ◽

pp. A1-A8 ◽

Cited By ~ 3

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 ◽

Audit Committees ◽

Financial Reporting Quality ◽

External Auditors ◽

Research Findings ◽

Recommendations For Practice

SUMMARY: This article provides a summary of the academic research findings on the attributes of effective audit committees and potential threats to financial reporting quality that should lead to heightened auditor and audit committee sensitivity. The practice implications of this research are then discussed in terms of appropriate communications among auditors, audit committees, and boards of directors.

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The Composition of Nonprofit Audit Committees

Accounting Horizons ◽

10.2308/acch.2006.20.1.75 ◽

2006 ◽

Vol 20 (1) ◽

pp. 75-90 ◽

Cited By ~ 44

Author(s):

Thomas E. Vermeer ◽

K. Raghunandan ◽

Dana A. Forgione

Keyword(s):

Nonprofit Organizations ◽

Audit Committee ◽

Nonprofit Sector ◽

Internal Audit ◽

Audit Committees ◽

Chief Financial Officers ◽

Independent Directors ◽

Government Grants ◽

Sarbanes Oxley ◽

Financial Expert

Audit committee composition has attracted significant attention from legislators and regulators in recent years. Although most of the focus has been on corporate audit committees, recent legislative efforts underscore the importance of governance in the nonprofit sector. Using data from a survey of 118 chief financial officers of nonprofit organizations as well as financial data from the GuideStar database, we examine the composition of nonprofit audit committees and factors associated with their composition. The data show that many nonprofits have not adopted Sarbanes-Oxley reforms, since we find that 36 percent of nonprofits have audit committees that are not completely independent. Organizations that are larger, receive government grants, and use a Big 4 auditor are more likely to have audit committees with solely independent directors. Surprisingly, universities and hospitals are less likely to have solely independent directors on the audit committee. Eighty-eight percent of nonprofits have at least one financial expert on the audit committee, and organizations that receive government grants and have an internal audit function are more likely to have a financial expert on the committee. Overall, our findings support the view that nonprofit audit committee composition varies in response to the demands related to the need for resources, the presence of other monitoring mechanisms, and the type of nonprofit.

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The Effect of Audit Committee and Board of Director Independence on Auditor Resignation

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2004.23.2.131 ◽

2004 ◽

Vol 23 (2) ◽

pp. 131-146 ◽

Cited By ~ 98

Author(s):

Ho Young Lee ◽

Vivek Mande ◽

Richard Ortman

Keyword(s):

Audit Committee ◽

Audit Committees ◽

Board Independence ◽

Negative Consequences ◽

External Auditors ◽

Board Of Director ◽

Time Period ◽

Auditor Resignation ◽

Director Independence ◽

Independent Audit

This study examines the relationship between audit committee and board independence and auditor resignations. Independent audit committee and board members, who are concerned about incurring legal liability and harming their reputations, support the external auditors in accomplishing their assurance duties. We use a logit model to compare audit committee and board independence between two types of auditor switches: 190 auditor-initiated switches versus 190 matched client-initiated switches during the time period 1996 to 2000. Our results show that audit committee and board of director independence are both negatively associated with the likelihood of an auditor resignation. Our results also show that audit committee independence is positively related to the quality of the firm's successor auditor. This suggests that independent audit committees also play a mitigating role in reducing the negative consequences associated with an auditor resignation.

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Do Auditors and Audit Committees Lower Fraud Risk by Constraining Inconsistencies between Financial and Nonfinancial Measures?

Current Issues in Auditing ◽

10.2308/ciia-52258 ◽

2018 ◽

Vol 12 (2) ◽

pp. P7-P15

Author(s):

Joseph F. Brazel

Keyword(s):

Audit Committee ◽

Audit Committees ◽

Audit Process ◽

Revenue Growth ◽

Fraud Risk ◽

Nonfinancial Measures ◽

Industry Expert ◽

Industry Expertise

SUMMARY Prior research finds that companies committing fraud exhibit large inconsistencies between reported revenue growth and growth in revenue-related nonfinancial measures (e.g., number of stores, employees, patents). Prior research also suggests that auditors, on average, are not adept at identifying and constraining these differences. This article summarizes a recent study by Brazel and Schmidt (2018) that examines whether certain auditors and audit committees are able to lower fraud risk by constraining inconsistencies between financial and related nonfinancial measures (NFMs). This practitioner summary first summarizes the motivation for the study, then discusses the methods used, explains the results, and concludes with a discussion of the study's implications. Brazel and Schmidt (2018) find that auditors with greater industry expertise and tenure, and audit committee chairs with greater tenure are less likely to be associated with companies that exhibit large inconsistencies between their reported revenue growth and related NFMs (higher fraud risk). Surprisingly, they observe that audit committees with industry expert chairs are more likely to be associated with large inconsistencies than audit committees without industry expert chairs. Overall, Brazel and Schmidt (2018) conclude that the audit process can constrain fraud risk, but not all forms of audit committee expertise may be beneficial.

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What Drives Auditor Selection?

Current Issues in Auditing ◽

10.2308/ciia-50779 ◽

2014 ◽

Vol 8 (1) ◽

pp. A26-A42 ◽

Cited By ~ 22

Author(s):

Elizabeth Dreike Almer ◽

Donna R. Philbrick ◽

Kathleen Hertz Rupley

Keyword(s):

Audit Committee ◽

Selection Process ◽

Information Source ◽

Audit Committees ◽

Policy Makers ◽

External Auditors ◽

Public Company ◽

Selection Decision ◽

Auditor Selection ◽

View Management

SUMMARY This study provides evidence on the factors that currently impact audit committee members' selection of external auditors. Using a two-stage approach, we survey and interview public company audit committee members (ACMs), and find evidence that management continues to provide input into the decision process even as SOX regulations require audit committees to take responsibility for the auditor selection decision. ACMs view management as an important information source when they assess the proposing audit partner's reputation for accessibility, timeliness, and ability to liaise with the firm's national technical office, as well as the proposing audit firm's technical and industry expertise. Results of this study can help firms be more competitive in the audit bidding process, inform policy makers when considering whether to impose further audit committee regulations, and aid academics in ensuring an up-to-date understanding of the audit committee's role in the auditor selection process.

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Client Importance and Earnings Management: The Moderating Role of Audit Committees

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-10111 ◽

2011 ◽

Vol 30 (3) ◽

pp. 125-156 ◽

Cited By ~ 32

Author(s):

Vineeta D. Sharma ◽

Divesh S. Sharma ◽

Umapathy Ananthanarayanan

Keyword(s):

Best Practices ◽

Earnings Management ◽

Financial Reporting ◽

Audit Committee ◽

Positive Association ◽

Auditor Independence ◽

Economic Importance ◽

Audit Committees ◽

Inside Ownership

SUMMARY This study provides empirical evidence on how the association between the economic importance of a client to the auditor and earnings management is moderated by the audit committee. We employ city office-level client importance fee-based measures, both performance-adjusted discretionary total and current accruals as proxies for earnings management, and a measure of audit committee best practices. We document a positive association between client importance and our two proxies for earnings management. This association is stronger for income-increasing earnings management. However, the association between client importance and earnings management is more pronounced when the audit committee does not meet best practices. We infer that the economic importance of a client appears to threaten auditor independence and thus the quality of financial reporting, but only when the audit committee exhibits characteristics associated with the provision of weak oversight. We also find that the association between client importance and earnings management is conditional on inside ownership, growth, leverage, and firm size, which are moderated by the audit committee. This study is the first to demonstrate that audit committees can moderate threats to auditor independence thus protecting the quality of financial reporting. The study discusses potential implications for policy making and empirical research.

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