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.

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.

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.

Audit committee activity and internal control quality in Egypt

2016 ◽  
Vol 31 (3) ◽  
pp. 269-289 ◽  
Author(s):  
Hichem Khlif ◽  
Khaled Samaha
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Relevant Information ◽  
Policy Implications ◽  
Content Type ◽  
External Auditors ◽  
Audit Market ◽  
Control Quality ◽  
Big 4 ◽  
The Relationship

Purpose – The purpose of this paper is to examine the association between audit committee activity, external auditor’s size and internal control quality (ICQ) in the Egyptian setting. It also explores how external auditor’s size moderates the relationship between audit committee activity and ICQ. Design/methodology/approach – To obtain relevant information about ICQ in Egypt, the authors conducted a survey among external auditors using an internal control checklist. Findings – Results show that audit committee activity has a significant positive effect on ICQ. In addition, Big 4 auditors contribute significantly to the improvement of the ICQ in the Egyptian setting. Finally, the association between audit committee activity and ICQ is more pronounced when an organisation is audited by a Big 4 audit firm. Originality/value – The results this paper demonstrate that Big 4 auditors play a governance role in weak legal environment as exists in Egypt by strengthening the effectiveness of audit committee meetings. The findings also have policy implications for Egyptian standard-setters and other emerging economies characterised by an under-developed and poorly regulated audit market, with respect to the development of internal auditing standards.

Audit Committee Quality and Internal Control: An Empirical Analysis

2005 ◽  
Vol 80 (2) ◽  
pp. 649-675 ◽  
Author(s):  
Jayanthi Krishnan
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Control Sample ◽  
Three Dimensions ◽  
Audit Committees ◽  
Control Problems ◽  
Time Period ◽  
Material Weaknesses ◽  
Recent Policy

I examine the association between audit committee quality and the quality of corporate internal control. While information on the quality of internal control is not generally available, companies changing auditors are required to disclose any internal control problems that were pointed out by their predecessor auditors. The empirical results are based on a comparison of companies disclosing such internal control problems with a control sample of companies changing auditors but not disclosing internal control problems. Audit committee quality is measured in three dimensions: its size, its independence, and its expertise. The internal control problems are observed at two levels of increasing seriousness: reportable conditions and material weaknesses. The sample time period precedes the effective dates of recent policy changes regarding audit committees. The results indicate that independent audit committees and audit committees with financial expertise are significantly less likely to be associated with the incidence of internal control problems. This is true for both levels of internal control problems. The results are consistent with recent policy emphasis on audit committee independence and expertise.

The impact of audit committee effectiveness on audit fees and non-audit service fees

2018 ◽  
Vol 31 (2) ◽  
pp. 174-191 ◽  
Author(s):  
Muhammad Jahangir Ali ◽  
Rajbans Kaur Shingara Singh ◽  
Mahmoud Al-Akra
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Fees ◽  
Audit Committees ◽  
Regulatory Requirements ◽  
Content Type ◽  
Financial Expertise ◽  
The Difference ◽  
Accounting Expertise ◽  
The Impact

Purpose The purpose of this study is to examine the impact of audit committee effectiveness on audit fees and non-audit service (NAS) fees in a less regulatory environment. Design/methodology/approach The authors construct a composite audit committee effectiveness measure incorporating audit committee independence, diligence, size, financial expertise and the chairperson’s accounting expertise. Findings The authors find that audit committee effectiveness has a positive significant impact on both audit fees and NAS fees. This suggests that effective audit committees can hold auditors accountable resulting in better audit quality and consequently higher audit fees. Originality/value The link between more effective audit committees with higher NAS purchases can be explained in light of the difference in regulatory requirements providing audit committees with decision rights on the use of NASs, therefore approving more NAS and increasing NASF. Additional tests and robustness analyses confirm the results.

scholarly journals How to regain public trust in audit firms? The case of the Financial Reporting Council

2018 ◽  
Vol 31 (3) ◽  
pp. 343-359 ◽  
Author(s):  
Mohamed Khaled Eldaly ◽  
Magdy Abdel-Kader
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Public Trust ◽  
Audit Committees ◽  
Structured Interviews ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
The Uk

Purpose This study aims to provide a better understanding of the role of the Financial Reporting Council (FRC), as the unified regulator of the audit profession in the UK, in restoring public trust in audit profession in the UK. It further analyses the views of partners in the Big 4 audit firms on this role. Design/methodology/approach The research data were gathered by conducting 17 semi-structured interviews with the top management of FRC’s members and executive partners of the Big 4 firms in the UK. The interviews were complemented by analysing data available on the web pages of the Big 4 firms and published reports related to the FRC’s projects. Findings This study identified three main strategies followed by the FRC to promote the trust and enhance the choice of auditors in the UK audit market. These strategies are improving the audit quality, increasing the transparency of the big audit firms and reducing the barriers to compete in the big audit market. Practical implications An analysis of the FRC’s efforts may help auditors to identify what they are expected to do to improve the reliability of information provided in the capital market. Audit committees can get a better understanding of the criteria that they need to improve the process of auditors’ choice. Auditors will also better understand how and why current audit regulations have been issued. This may improve their satisfaction with regulations and standards, and their efficient implementation. Furthermore, it is believed that audit regulators need to get feedback additional to the formal feedback they receive to improve their performance and current regulations. Originality/value This paper contributes to the literature by discussing the auditors’ criticism to the Audit Inspection Unit’s inspectors and the way the inspectors defend themselves. The findings suggest that partners of the Big 4 believe that the FRC’s projects effectively participate in improving the audit quality, as well as providing wider information about the audit firms to the public. However, different actions need to be taken to enhance the choice of auditors and increase the number of big audit firms that compete in the market.

scholarly journals Audit Committee Accounting Expertise and Audit Quality – the Case of Going-Concern Opinions

2021 ◽  
Vol 10 (3) ◽  
pp. 27
Author(s):  
Gnanakumar Visvanathan
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Committees ◽  
Type I ◽  
Type I Errors ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Prior Literature ◽  
Accounting Expertise ◽  
Going Concern Reports

This study examines whether audit committee accounting expertise and other audit committee characteristics promote or deter the likelihood of receiving going-concern reports from the auditors and whether such characteristics shield auditors from dismissals after the issuance of a going-concern report. The study finds no significant association between the likelihood of a going-concern report and audit committee accounting expertise or other audit committee characteristics. No significant association is also found for auditor dismissals following going-concern reports and audit committee accounting expertise. These results contrast with prior literature that examined data preceding the passage of the Sarbanes-Oxley Act of 2002 (hereafter SOX) or the period immediately thereafter. Additional analysis shows that audit committee accounting expertise is found to improve the information in going-concern audit opinions by reducing Type I errors, however. Overall, these findings shed light on the evolving role of audit committees in overseeing the auditors and have implications for regulators interested in improving audit quality and investors interested in improving the effectiveness of audit committees. 

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.

Office-Client Balance and Metro Area Audit Market Competition

2020 ◽  
Vol 39 (4) ◽  
pp. 113-141
Author(s):  
Michael L. Ettredge ◽  
Matthew G. Sherwood ◽  
Lili Sun
Keyword(s):  
Relative Abundance ◽  
Audit Quality ◽  
Market Competition ◽  
Data Availability ◽  
Financial Statement ◽  
Audit Market ◽  
Metro Area ◽  
Big 4 ◽  
Jel Classifications

SUMMARY We propose a new audit supplier competition construct, the Office-Client Balance (OCB), which consists of the relative abundance of competing audit offices and audit clients in a metropolitan (metro) area. From this construct, we derive a metro level audit competition proxy reflecting surpluses or shortfalls of total metro audit office numbers relative to the national metro OCB norm: the OCB_TOT. Consistent with the predictions of Porter's Five Forces theory, we find that OCB_TOT is associated with lower fees, more auditor turnover, and more (less) office exits (entrances) in metro audit markets. These findings validate OCB_TOT as a proxy for audit market competition. Our results indicate that greater metro level competition among auditors (more positive OCB_TOT) is associated with higher audit quality, proxied by fewer financial statement misstatements. Several additional analyses suggest that OCB_TOT is useful in explaining clients' choices of local (versus remote) audit offices and Big 4 (versus non-Big 4) offices. Data Availability: Data used in this study are available from public sources. JEL Classifications: G18; L10; M42.

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