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The effect of audit committee performance on earnings quality
The effect of audit committee performance
Jerry W. Lin Department of Accounting, University of Minnesota Duluth, Duluth, Minnesota, USA
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June F. Li Department of Business Administration, University of Wisconsin – River Falls, River Falls, Wisconsin, USA, and
Joon S. Yang Department of Accounting, University of Minnesota Duluth, Duluth, Minnesota, USA Abstract Purpose – The role of audit committees in ensuring the quality of corporate financial reporting has come under considerable scrutiny due to recent high-profile “earnings management” cases and the collapse of Enron. The purpose of this paper is to examine the association between the characteristics of audit committees (size, independence, financial expertise, activity, and stock ownership) and earnings restatement – a direct measure of earnings management. Design/methodology/approach – Univariate correlations and multivariate statistical analyses are performed. In particular, a multivariate logistic regression model is used. Findings – Evidence suggests a negative association between the size of audit committees and the occurrence of earnings restatement. The remaining four audit committee characteristics are not found to have a significant impact on the quality of reported earnings. Research limitations/implications – This study focuses on the fiscal year 2000 only. As data become available for more fiscal years, future studies may re-examine the issue. Originality/value – Results of this research provide useful information for the accounting profession, the regulators and corporations on the effective practice of audit committees. Keywords Audit committees, Corporate governance, Earnings Paper type Research paper
Introduction The role of audit committees in ensuring the quality of corporate financial reporting has come under considerable scrutiny due to recent high-profile accounting scandals or “earnings management” cases (e.g. waste management and WorldCom) and the collapse of Enron. Since the value of a firm is linked to reported earnings figures, it creates economic incentives or pressures for management to engage in earnings management. Former US Securities and Exchange Commission (SEC) Chairman Levitt (1998) expressed his serious concerns over earnings management in his famous “the Numbers Game” speech. He called for a fundamental cultural change for corporate management and strengthening corporate governance, especially improving the effectiveness of audit committee. To address the concerns, the “Blue Ribbon Commission on Improving the Effectiveness of Corporate Audit Committees” (BRC) was formed and it issued a set of
Managerial Auditing Journal Vol. 21 No. 9, 2006 pp. 921-933 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900610705019
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ten recommendations aimed at strengthening the independence and effectiveness of the audit committee (BRC, 1999). In addition, the SEC requires firms to provide disclosures regarding the memberships and activities of their audit committees. Firms are also required to attach a copy of the audit committee’s charter and report to proxy statements filed on or after 15 December 2000 (SEC, 1999). Such recommendations and disclosures are expected to provide the investors with information about the effectiveness of a firm’s audit committee in ensuring the integrity of the financial reporting process. Several studies have examined the effectiveness of audit committees in limiting earnings management (Abbott et al., 2004; Be´dard et al., 2004; Klein, 2002; Xie et al., 2003; Yang and Krishnan, 2005). While various definitions exist for “earnings management” (Healy and Wahlen, 1999; Schipper, 1989), earnings management is inherently unobservable. Thus, these studies, with the exception of Abbott et al. (2004), use various measures of discretionary (abnormal) accruals as proxies for earnings management. Discretionary accruals involve assumptions and estimates of the non-discretionary portion of the total accruals. Therefore, the reliability of estimated discretionary accruals as a measure of earnings management decreases as the magnitude of estimation errors increases (Dechow and Dichev, 2002). Similarly, Guay et al. (1996) contend that accruals derived from alternative models involve considerable imprecision. Bernard and Skinner (1996) present similar argument that abnormal accruals derived using the Jones-type models reflect measurement errors partly because of the misclassification of normal as abnormal accruals. All these studies use data for fiscal periods prior to fiscal year 2000 when the SEC regulations incorporating BRC’s recommendations became effective. Therefore, the empirical question on whether the BRC recommendations and the related regulatory changes have helped improve audit committee effectiveness in limiting the likelihood of earnings management remains to be answered. Using data collected from proxy statements, this study examines the association between audit committee characteristics and a more direct (observable) measure of aggressive earnings management – earnings restatement. The issues related to earnings restatement are of particular interests because of the consequences and increasing occurrences of earnings restatement as discussed later in the prior research section. Also, this study is the first to include several variables related to audit quality that have been shown to have a strong effect on the quality of reported earnings (Frankel et al., 2002; Li and Lin, 2006). Further, while there are increasing concerns that compensating audit committee members with stock and stock options may impair their independence (Millstein, 2002), the empirical evidence is very limited. Thus, this study also examines the impact of stock ownership by audit committee members on the occurrence of earnings restatement. The rest of the paper is organized as follows. In the next section, we review prior research on the determinants and consequences of earnings restatement and on the effectiveness of audit committees, and develop the hypotheses. We then discuss the research methodology, which is followed by discussions of empirical results. The last section concludes the paper.
Prior research and hypotheses Several studies have investigated the determinants and consequences of earnings restatement. Higher market expectations for future earnings growth and higher levels of outstanding debt appear to be the characteristics of firms that restate earnings (Richardson et al., 2002). Restatements of core accounts (mainly revenue accounts) appear to be associated with a higher frequency of fraud and subsequent bankruptcy (Palmrose and Scholz, 2002). In addition, the more material a restatement is, the more negatively security price responds to the restatement (Owers et al., 2002; Palmrose and Scholz, 2002). However, studies on market reactions to causes for earnings restatement have reported inconsistent results. On the one hand, the market seems to be more concerned with restatements that are associated with management integrity than those related to technical accounting issues (Palmrose et al., 2004). On the other hand, Owers et al. (2002) find that of the categories of restatements, accounting issues (errors, irregularities or method-changes) have the most negative market reactions. This is especially true when there is a contemporaneous change in the firm’s CEO. The effectiveness of audit committees has been a subject of increasing interests due to increased concerns about the quality of corporate financial reporting process caused by recent accounting scandals. While many studies have focused on the characteristics of audit committees as determinants of their effectiveness (see DeZoort et al., 2002 for a review), a recent study has examined the impact of audit committee characteristics in the context of restatement. Abbott et al. (2004) report that an audit committee that is independent, meets at least four times a year, and includes at least one member with financial expertise is negatively associated with the occurrence of restatement in the period of 1991-1998. Independence of audit committee members has been the focus of most of the prior work. A common expectation is that independent audit committee directors would ensure better financial reporting (SEC, 1999), and the expectation is generally supported by existing empirical evidence (Abbott et al., 2000; Beasley et al., 2000). Specifically, Abbott et al. (2004) document a negative association between occurrence of earnings restatement and audit committee consisting of only independent directors. To examine the relationship between audit committee independence and earnings quality, this study tests the H1 (stated in the alternative form): H1. There is a significantly negative association between audit committee independence and the occurrence of earnings restatement. Encouraged by the BRC (1999), the SEC (1999) mandates that audit committees consist of a minimum of four directors. Empirical studies provide mixed evidence of the impact of audit committee size on financial reporting quality. Xie et al. (2003) find no significant association between the number of directors on the audit committee and earnings management. Similarly, Abbott et al. (2004) find no impact of audit committee size on earnings restatement. On the other hand, Yang and Krishnan (2005) find that audit committee size is negatively associated with earnings management (using abnormal accrual as proxy), implying that a certain minimum number of audit committee members may be relevant to quality of financial reporting. To further examine the relationship between audit committee size and earnings quality, this study tests the H2 (stated in the alternative form):
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H2. There is a significantly negative association between audit committee size and the occurrence of earnings restatement.
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SEC (1999) requires that every audit committee includes at least one member with financial expertise. DeZoort and Salterio (2001) argue that the audit committee’s financial expertise increases the likelihood that detected material misstatements will be communicated to the audit committee and corrected in a timely fashion. Abbott et al. (2004) report a negative association between the audit committee’s financial expertise and occurrence of earnings restatement. To examine the relationship between the audit committee’s financial expertise and earnings quality, this study tests the H3 (stated in the alternative form): H3. There is a significantly negative association between the audit committee’s financial expertise and the occurrence of earnings restatement. While it is not mandated by the SEC, the BRC (1999) recommends that audit committees meet at least once quarterly and discuss financial reporting quality with the external auditor. The number of meetings (a proxy for diligence) is used in prior research because inactive audit committees are unlikely to monitor management effectively (Menon and Williams, 1994). Beasley et al. (2000) find that audit committees of firms charged by the SEC for fraudulent financial reporting meet less frequently than those of non-fraudulent firms. Abbott et al. (2004) find that audit committees of firms restating their financial statements are not likely to meet at least four times a year. To further examine the relationship between the frequency of audit committee meetings and earnings quality, this study tests the H4 (stated in the alternative form): H4. There is a significantly negative association between audit committee meetings and the occurrence of earnings restatement. Lastly, there are concerns that compensating audit committee members with stock and stock options may result in impairing their independence (Millstein, 2002). However, empirical evidence on this issue is very limited until recently. Be´dard et al. (2004) document that the more stock options that can be exercised in the short-run relative to the total of options and stocks held by audit committee members, the higher the likelihood of aggressive earnings management. Yang and Krishnan (2005) document that stock ownership by directors on the audit committee is positively associated with earnings management (using abnormal accrual as the proxy). These results contradict the findings by Beasley (1996) that the likelihood of fraudulent financial reporting decreases as stock ownership by outside directors on the board (not necessarily on the audit committee) increases. It is unclear that the results pertaining to earnings management (abnormal accrual) would apply to earnings restatement. To further examine the relationship between audit committee stock ownership and earnings quality, this study tests the H5 (stated in the alternative form): H5. There is a significant association between audit committee stock ownership and the occurrence of earnings restatement.
Research methodology Sample selection The initial sample firms consist of 267 publicly-held corporations in the USA that restated their reported earnings for the fiscal year 2000 and are identified by using keyword searches of Lexis-Nexis on the words “income or earnings restatement” and their variations. These firms are then screened for availability of requisite financial data on research insight (personal-computer version of Compustat), data on fees paid to external auditors, and data on audit committees in proxy statements. The restatement sample includes 106 firms, after deleting 106 firms due to incomplete financial data, 44 firms due to missing auditor fee data, and 11 firms due to missing audit committee data. We match each restatement sample firm with a non-restatement firm based on four-digit SIC code and firm size. All control sample firms are screened for earnings restatement (or a lack of). This results in a final sample of 212 firms. Tables I and II summarize the sample selection process and industry composition of the final sample. As indicated earlier, fiscal year 2000 is the focus of this study because it is the first year that publicly-held companies are required by the SEC to improve disclosures relating to the functioning of audit committees (SEC, 1999). In addition, the major US stock exchanges have proposed changes to their listing requirements to enhance the independence and expertise of audit committees. This presents a first opportunity allowing the examination of the association between audit committee characteristics and quality of reported earnings after the major reform in audit committees. Restatements of earnings for fiscal year 2001 and thereafter are not included because
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Observations Firms restating earnings for the fiscal year 2000 identified from Lexis-Nexis Less: financial data not available from research insight Less: auditor fee data not available from the proxy statements Less: audit committee data not available from the proxy statements Final sample
267 (106) (44) (11) Restatement firms: 106 Control firmsa: 106
Note: aControl firms are matched based on four-digit SIC code and total assets
SIC code 100-999 1000-1999 2000-2999 3000-3999 4000-4999 5000-5999 6000-6999 7000-7999 8000-8999 Total sample (n)
Table I. Screening procedure
Observations 2 12 42 68 14 32 4 28 10 212
Table II. Sample composition
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there is a considerable time lag between original reporting and subsequent restatement of earnings for the same fiscal year. This sample screening criterion provides reasonable assurance that any control firm would not restate its earnings for fiscal year 2000. Model specification We utilize the following logistic regression model, where the dependent variable (RESTMT) equals “1” if the firm restated its earnings for fiscal year 2000, and “0” otherwise. ACINDD, ACSIZED, ACEXPD, ACMEETD, and ACOWNPT are the audit committee variables to test our hypotheses. The other variables in the model are included to control for factors related to audit quality and financial characteristics of the firms that may influence management’s decision to manage or manipulate reported earnings: RESTMT ¼ b0 þ b1 ACINDD þ b2 ACSIZED þ b3 ACEXPD þ b4 ACMEETD þ b5 ACOWNPT þ b6 BIG5 þ b7 AUDTEN þ b8 LNAUFEE þ b9 LNNONAU þ b10 CFO þ b11 ABSCFO þ b12 ACC þ b13 ABSACC þ b14 MKRTX þ b15 LOSS þ b16 MKBKF þ b17 LEVERG þ b18 FINACQ þ b19 LNMVE þ 1 ACINDD (audit committee independence) is equal to “1” if all the audit committee members are independent, and “0” otherwise. ACSIZED (audit committee size) is equal to “1” if the audit committee consists of at least four members, and “0” otherwise. ACEXPD (audit committee financial expertise) is equal to “1” if the audit committee includes at least one financial expert, and “0” otherwise. ACMEETD (audit committee meetings) is equal to “1” if the audit committee meets at least four times for the year, and “0” otherwise. ACOWNPT (audit committee stock ownership) is measured as the percentage of outstanding common shares held by the audit committee members. In addition to the five audit committee variables, this study includes two variables as proxies for audit quality. Prior studies suggest that Big-5 auditors (BIG5) are less likely to allow earnings management than non-Big-5 auditors (Becker et al., 1998; Francis et al., 1999). Another variable is auditor tenure (AUDTEN) measured in the number of years the same auditor has audited the client’s financial statements. Prior research suggests that auditor independence decreases as the length of auditor tenure increases (Beck et al., 1988; Lys and Watts, 1994). On the other hand, others claim that as auditor tenure increases, the auditor is better at assessing risk of material misstatements by gaining insights into the client’s operations and business strategies (Arens et al., 2003). This study also includes two fee variables, log transformations of fees for audit (LNAUFEE) and non-audit services (LNNONAU), as proxies for auditor independence. These two measures are consistent with the argument that higher fees from either kind of services would presumably increase the economic bond and thus impair auditor independence and audit quality (Kinney and Libby, 2002). This study also includes several variables that are frequently used in prior research to control for other factors influencing management’s incentives to manage or manipulate reported earnings. Several measures of firm performance are reported to be correlated with earning management (or earnings quality) in prior studies (Dechow
et al., 1995; Frankel et al., 2002; McNichols, 2000): cash flows from operations deflated by average total assets (CFO), the absolute value of cash flows from operations deflated by average total assets (ABSCFO), total accruals deflated by average total assets (ACC), the absolute value of total accruals deflated by average total assets (ABSACC), annual market returns (MKRTX) and an indicator variable (LOSS) equal to “1” if the firm reports a loss for fiscal year 2000, and “0” otherwise. In addition, Matsumoto (2002) suggests that firms with higher growth prospects are more likely to manage earnings. Growth prospects are measured by the market-to-book ratio (MKBKF). This study also includes financial leverage (LEVERG), measured as the ratio of total liabilities to total assets, and a financing indicator variable (FINACQ) equal to “1” if the firm issued equity or debt securities during 2000, and “0” otherwise. These two variables are included because prior studies find leverage and external financing needs are related to earning management (Becker et al., 1998; DeAngelo et al., 1994). Finally, this study controls for firm size measured as the natural log transformation of market value of equity (LNMVE). Table III summarizes the definitions of all variables.
RESTMT ACINDD ACSIZED ACEXPD ACMEETD ACOWNPT BIG-5 AUDTEN LNAUFEE LNNONAU CFO ABSCFO ACC ABSACC MKRTX LOSS MKBKF LEVERG FINACQ LNMVE
An indicator variable equal to “1” if the sample firm restated its earnings for the fiscal year, “0” otherwise (the dependent variable) An indicator variable equal to “1” if all the audit committee members are independent, “0” otherwise An indicator variables equal to “1” if the audit committee consists of at least four members, and “0” otherwise An indicator variable equal to “1” if at least one of the audit committee members is a financial expert, and“0” otherwise An indicator variable equal to “1” if the audit committee meet at least four times for the fiscal year, and “0” otherwise Percentage of outstanding common stock shares held by the audit committee members An indicator variable equal to “1” if the auditor is a Big-5 firm, and “0” otherwise Number of years the auditor has audited the firm ¼ s financial statements Natural logarithm of fees paid to the auditor for audit services Natural logarithm of paid to the auditor for non-audit services Cash flows from operating activities, deflated by average total assets Absolute value of cash flows from operating activities, deflated by average total assets Total accruals (i.e. net income minus cash flows from operating activities), deflated by average total assets Absolute value of total accruals (i.e. net income minus cash flows from operating activities), deflated by average total assets Annual market return of the firm ¼ s common stock An indicator variable equal to “1” if the firm reported loss for the fiscal year, and “0” otherwise Market value to book value for common equity to measure growth prospects Leverage ratio defined as ratio of total liabilities relative to total assets An indicator variable equal to “1” if the firm issued equity or debt securities during the fiscal year, and “0” otherwise Natural logarithm of market value of equity at year end
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Table III. Definitions of variables
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Empirical results Descriptive statistics and univariate analysis Table IV shows the means and t-statistics for the pooled sample firms, the restatement sample firms and their matched control firms. The restatement and control firms differ significantly, at the 0.10 level, in audit committee activities, ACMEETD (whether the audit committee met at least four times for the year) and the extent of stock ownership by audit committee members, ACOWNPT (the percentage of outstanding common shares held by audit committee members). For the control variables, the two groups differ significantly only in the percentage of firms audited by Big-5 audit firms, fees paid to their independent auditors for non-audit services, and whether they reported a net loss for the year. All the other audit committee and control variables are not significantly different between the restatement and control groups. Table V presents the univariate Pearson’s correlations and Spearman’s rank correlations between earnings restatement (RESTMT), the dependent variable, and audit committee variables, and between audit committee variables. The results indicate that audit committee stock ownership (ACOWNPT) is significantly (at the 0.10 level) negatively correlated with occurrence of earnings restatement as expected. Also, the number of audit committee meetings (ACMEETD) is significantly (at the 0.10 level) positively correlated with occurrence of earnings restatement. The other audit committee variables are not significantly correlated with occurrence of earnings restatement. However, these results on the relationships between audit committee variables and occurrence of earnings restatement are obtained without controlling for
Variable ACINDD ACSIZED ACEXPD ACMEETD ACOWNPT BIG5 AUDTEN LNAUFEE LNNONAU CFO ABSCFO ACC ABSACC MKRTX LOSS MKBKF LEVERG FINACQ LNMVE n Table IV. Descriptive statistics
Pooled sample
Mean Restatement firms
Control firms
t-statistica
0.858 0.887 0.481 0.557 2.810 0.939 8.382 12.644 12.199 0.019 0.121 20.064 0.109 5.319 0.396 0.132 0.522 0.943 5.531 212
0.868 0.859 0.453 0.623 1.865 0.972 8.066 12.873 12.156 0.008 0.113 2 0.062 0.125 2.275 0.472 2 2.561 0.527 0.934 5.617 106
0.849 0.915 0.509 0.491 3.755 0.906 8.698 12.415 12.242 0.029 0.130 20.067 0.092 8.363 0.321 2.824 0.517 0.953 5.445 106
0.39 2 1.30 2 0.82 1.94 * 2 1.65 * 2.01 * * 2 0.78 2.80 * * * 2 0.14 2 0.83 2 0.82 0.21 1.50 2 0.44 2.26 * * 2 1.26 0.16 2 0.59 0.52
Notes: * * *, * *, and * indicate significance at the 1, 5, and 10 per cent levels, respectively, two-tailed; for testing that the means for the groups are significantly different from each other; see Table III for variable definitions
a
RESTMT
ACINDD
ACSIZED
Panel A: Pearson’s correlations (n ¼ 212) RESTMT 1.000 0.027 2 0.089 ACINDD 1.000 0.111 ACSIZED 1.000 ACEXPD ACMEETD ACOWNPT Panel B: Spearman’s Rank Correlations (n ¼ 212) RESTMT 1.000 0.027 2 0.089 ACINDD 1.000 0.111 ACSIZED 1.000 ACEXPD ACMEETD ACOWNPT
ACEXPD
ACMEETD
ACOWNPT
20.057 20.097 0.135 * * 1.000
0.133 * 0.074 0.011 0.042 1.000
20.113 * 20.040 0.026 0.015 20.219 * * * 1.000
20.057 20.097 0.135 * * 1.000
0.133 * 0.074 0.011 0.042 1.000
20.123 * 20.038 0.055 0.012 20.351 * * * 1.000
Notes: * * *, * *, and * indicate significance at the 1, 5, and 10 per cent levels, respectively, one-tailed; see Table III for variable definitions
other factors related to audit quality and characteristics of the firm. To control for the potential effects of these factors, a multivariate logistic regression model is used with results discussed next. Also, while some of the pair-wise correlations between audit committee variables are significant, they are all relatively low and well below the 0.8 threshold that may cause significant multi-collinearity problems (Gujarati, 1995). Multivariate results Table VI reports the multivariate logistic regression results. The H1 states that there is a significantly negative association between audit committee independence and occurrence of earnings restatement. As shown in Table VI, this hypothesis is not supported, regardless of whether the audit committee independence is measured as the percentage of independent directors on the audit committee or as a dichotomy (all audit committee directors being independent or not). The H2 predicts that audit committee size is significantly negatively associated with occurrence of earnings restatement. As presented in Table VI, this hypothesis is supported. The association between audit committee size and occurrence of earnings restatement is significantly negative at the 0.10 level. Also, this relation remains significantly negative when the audit committee size is measured as the number of directors on the committee and as a dichotomy (i.e. whether audit committee consists of at least four directors). The H3 states that the financial expertise of audit committee is significantly negatively associated with occurrence of earnings restatement. The result presented in Table VI does not support this hypothesis. There is no significantly negative association between the occurrence of earnings restatement and audit committee financial expertise, regardless of whether audit committee financial expertise is measured as the actual number of committee members who have financial expertise or as a dichotomy (i.e. whether at least one committee member has financial expertise). Hypothesis four predicts a significantly negative relationship between occurrence of earnings restatement and audit committee activities (meetings). As reported in Table VI, the hypothesis is not supported. No significantly negative association exists
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Table V. Correlations between restatement and audit committee variables
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Table VI. Summary statistics from logistic regression
Variable Intercept ACINDD ACSIZED ACEXPD ACMEETD ACOWNPT BIG5 AUDTEN LNAUFEE LNNONAU CFO ABSCFO ACC ABSACC MKRTX LOSS MKBKF LEVERG FINACQ LNMVE N
Coefficient Estimate
x2
2 6.779 * * * 0.081 2 0.981 * 2 0.194 0.257 2 0.033 2.040 * * 2 0.040 0.702 * * * 2 0.185 * * 1.122 2 1.529 2.819 3.772 * 0.002 0.865 * * 2 0.031 2 0.312 2 0.510 2 0.045 212
6.965 0.030 3.110 0.361 0.579 1.700 5.029 2.013 8.460 4.880 0.525 0.671 2.359 3.536 1.593 3.873 1.102 0.284 0.523 0.164
Notes: * * *, * *, and * indicate significance at the 1, 5, and 10 per cents levels, respectively, one-tailed; see Table III for variable definitions
between occurrence of earnings restatement and audit committee activity in terms of actual number of meetings or as a dummy variable taking the value of one if the audit committee had four or more meetings for the fiscal year affected by the restatement. Finally, the H5 states that stock ownerships by audit committee members may significantly associated with occurrence of earnings restatement. Table VI reports no such significant relationship and H5 is not supported. Overall, the results presented in Table VI support only H2 that there exists a significantly negative association between the occurrence of earnings restatement and audit committee size. Summary and conclusions This study examines the association between the occurrence of earnings restatement and characteristics of the audit committee. The results presented in Table VI support the hypothesis that a larger audit committee may provide more oversight over the financial reporting process. Such oversight seems to improve earnings quality by reducing the probability of restating financial statements after their original filings with the SEC. The findings support one of the recommendations made by the BRC in 1999 and the subsequent SEC (1999) regulations for implementing the BRC recommendations. However, the other four hypotheses are not supported. In other words, this study provides no evidence that the other audit committee characteristics – independence, financial expertise, activity, and stock ownership – have any impact on quality of reported earnings. These findings are obtained after controlling for several variables that are frequently used in prior research to control for other factors
influencing management’s incentives to manage or manipulate reported earnings. Moreover, the results remain the same when variables used to control for audit quality are included in the model. These control variables related to audit quality are not used in prior similar studies. Finally, the results are robust to alternative measures of the audit committee characteristics variables. However, this study focuses on the fiscal year 2000 only. As data become available for more fiscal years, future studies may re-examine the issue of how audit committee characteristics affect quality of financial reporting. References Abbott, L.J., Park, Y. and Parker, S. (2000), “The effects of audit committee activity and independence on corporate fraud”, Managerial Finance, Vol. 26, pp. 55-67. Abbott, L.J., Parker, S. and Peters, G.F. (2004), “Audit committee characteristics and restatements”, Auditing: A Journal of Practice & Theory, Vol. 23, pp. 69-87. Arens, A., Elder, R. and Beasley, M. (2003), Auditing and Assurance Services: An Integrated Approach, 9th ed., Prentice-Hall, Englewood Cliffs, NJ. Beasley, M.S. (1996), “An empirical analysis of the relation between board of director composition and financial statement fraud”, The Accounting Review, Vol. 71, pp. 443-65. Beasley, M.S., Carcello, J.V., Hermanson, D.R. and Lapides, P.D. (2000), “Fraudulent financial reporting: consideration of industry traits and corporate governance mechanisms”, Accounting Horizons, Vol. 14, pp. 441-54. Beck, P., Frecka, T. and Solomon, I. (1988), “An empirical analysis of the relationship between MAS involvement and auditor tenure: implications for auditor independence”, Journal of Accounting Literature, Vol. 7, pp. 65-84. Becker, C.L., DeFond, M.L., Jiambalvo, J. and Subramanyam, K.R. (1998), “The effect of audit quality on earnings management”, Contemporary Accounting Research, Vol. 15, pp. 1-24. Be´dard, J., Chtourou, S.H. and Courteau, L. (2004), “The effect of audit committee expertise, independence, and activity on aggressive earnings management”, Auditing: A Journal of Practice & Theory, Vol. 23, pp. 13-35. Bernard, V. and Skinner, D. (1996), “What motivates managers’ choice of discretionary accruals?”, Journal of Accounting and Economics, Vol. 22 Nos 1/3, pp. 313-25. Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC) (1999), Report and Recommendations of Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, NYSE/NASD, New York, NY/Washington, DC. DeAngelo, H., DeAngelo, L. and Skinner, D.J. (1994), “Accounting choice in troubled companies”, Journal of Accounting and Economics, Vol. 10 Nos 1/2, pp. 193-225. Dechow, P.M., Sloan, R.G. and Sweeney, A.P. (1995), “Detecting earnings management”, The Accounting Review, Vol. 70, pp. 193-225. Dechow, P.M. and Dichev, I.D. (2002), “The quality of accruals and earnings: the role of accrual estimation errors”, The Accounting Review, Vol. 77, pp. 35-59. DeZoort, F.T. and Salterio, S.E. (2001), “The effects of corporate governance experience and financial reporting and audit knowledge on audit committee directors’ judgments”, Auditing: A Journal of Practice & Theory, Vol. 20, pp. 31-48.
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[email protected]
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