• Selected
• Entire List

Abstract:
This study investigates whether a firm's corporate governance practices have an effect on the quality of its publicly released financial information. In particular, we examine the relationship between audit committee and board of directors characteristics and the extent of corporate earnings management as measured by the level of positive and negative discretionary accruals. Using two groups of US firms, one with relatively high and one with relatively low levels of discretionary accruals in the year 1996, we find that earnings management is significantly associated with some of the governance practices by audit committees and boards of directors. For audit committees, income increasing earnings management is negatively associated with a larger proportion of outside members who are not managers in other firms, a clear mandate for overseeing both the financial statements and the external audit, and a committee composed only of independent directors that meets more than twice a year. We also find that short-term stocks options held by non-executive committee members are associated with income increasing earnings management. Income decreasing earnings management is negatively associated with the presence of at least a member with financial expertise and a clear mandate for overseeing both the financial statements and the external audit.

For the board of directors, we find less income increasing earnings management in firms whose outside board members have experience as board members with the firm and with other firms. We also find that larger board, the importance of the ownership stakes in the firm held by non-executive directors, and experience as board members seems to reduce income decreasing earnings management.

Our results provide evidence that effective boards and audit committees constrain earnings management activities. These findings have implications for regulators, such as the Securities and Exchange Commission (SEC), as they attempt to supervise firms whose financial reporting is in the gray area between legitimacy and outright fraud and where earnings statements reflect the desires of management rather than the underlying financial performance of the company, as pointed out by the Blue Ribbon Committee (1999).

Corporate governance; Audit committee; Earnings management; Discretionary accruals

Abstract:
This study investigates whether the internal control requirements of Section 302 and Section 404 of the Sarbanes-Oxley Act of 2002 are related to improved earnings quality. Using unexpected total and current accruals as measures of earnings quality, I test the association of internal control weaknesses disclosed under both sections and unexpected accruals for the disclosure year. I find level that the absolute level of unexpected accruals increases in the year internal control weaknesses are disclosed. This is consistent with an increase in earnings quality and suggests that in the internal control weaknesses disclosure year, management reverses, voluntarily or at the auditor's request, prior accruals that were too large. Comparing Sections 302 and 404 disclosures, I find that the magnitude of unexpected accruals is larger for Section 302 disclosures, implying that the nature and significance of the problems might more severe for Section 302 disclosures. For companies reporting an effective internal control in their Section 404 report, I find a decrease in the magnitude of unexpected accruals in the year of their first report. This result suggests that because of Section 404 formal internal control assessment process, firms improved their internal control and/or auditor increased their audit effort, resulting in management booking smaller accruals for events and transactions occurring in that year. Overall, my results suggest that the Sarbanes-Oxley Act internal control requirements resulted in an improved earnings quality.

Internal controls, Unexpected accruals, Earnings quality, Auditing, Sarbanes-Oxley Act

Abstract:
This paper reviews literature on audit committees in order to evaluate the extent to which committees are effective in terms of strengthening financial reporting. Specifically, we examine academic research on the topic of audit committee effectiveness published in a variety of accounting journals from 1994 until 2008. In particular, our review investigates from a meta-perspective the results reported in studies which examine the relationship between certain audit committee characteristics and measures of audit committee effectiveness. A large proportion of the studies report a positive association between effectiveness and the following characteristics: presence of the audit committee; audit committee members’ independence; and members’ competencies. However, the number of meetings and the size of the committee are not frequently associated positively with audit committee effectiveness. Our review also highlights important gaps in literature. Most studies are relational and explanatory; very few studies are exploratory, descriptive or transformative. Psychological and sociological perspectives of analysis are neglected. Knowledge is scant on audit committees in jurisdictions which do not follow the Anglo-Saxon model of corporate governance. Further, research on dynamics surrounding audit committee processes is scarce. As a result of these gaps in literature, our review aims to sensitize accounting researchers about the appropriateness of extending the boundaries of research on audit committees: methodologically, theoretically, and geographically speaking. Further, by summarizing research results on the effectiveness of various audit committee attributes, our review can be useful for regulators in terms of assessing the impact of extant regulation or in terms of implementing new regulation. Regulators and practitioners, however, should be careful in interpreting the results; 59 percent of the studies we reviewed focus on US public companies and most of the other studies rely on data gathered in countries characterized by the Anglo-Saxon model of corporate governance.

Audit committee, Corporate governance, Effectiveness, Regulation, Review of literature

Abstract:
We empirically investigate the impact of the QSSP tax incentive on the issue price of shares of initial public offerings of Quebec-based firms during 1982 to 2002. Consistent with expectations, we find that, after controlling for IPO underpricing, the underpricing of IPOs is significantly negatively associated with the QSSP deduction. However, our results suggest that although issuing corporations benefited from the QSSP program through higher issue prices, Quebec individual investors reaped a much larger proportion of the tax benefit than the corporations. Furthermore, contrary to expectations, our evidence indicates that the presence of non-QSSP eligible investors had no significant effect on the sharing of the tax benefit.

Implicit taxes, Initial public offerings, Underpricing, Marginal investor, Tax incentives, Quebec Stock Savings Plan

Abstract:
The Sarbanes-Oxley Act (SOX) greatly expanded audit committees’ oversight responsibilities by requiring that they pre-approve all non prohibited non-audit services (NAS), effectively making them “the gatekeepers” of auditor independence. Motivated by the SOX requirement and the controversy over the potential independence-impairing nature of tax NAS, we examine factors that are associated with audit committees’ decisions to approve tax NAS purchases for the years 2004 through 2007. We find that accounting financial experts are less likely to approve the purchase of any tax NAS than other audit committee members and, when they do, they approve lower levels relative to audit fees, suggesting that they are sensitive to the perceived threats to auditor independence. We find no such relation with non-accounting financial experts. We also find that audit committee members that hold multiple directorships approve lower levels of tax fees relative to audit fees than non busy members, possibly because they are concerned with the potential negative effects on their reputational capital if they approve high levels. Finally, in the presence of active institutional investors, audit committees approve lower levels of tax NAS (both in absolute amounts and relative to audit fees). Overall, our results suggest that audit committees make decisions consistent with concerns about independence impairment both in fact and in appearance, as requested by the SEC.

Audit committee expertise, tax services, auditor independence

Abstract:
Our results support the worldwide movement in legislations requiring AC independence and expertise. They stress the importance of the presence of qualified members on the AC with sufficient knowledge of accounting and finance. Our results suggest that the AC is a credible signal that could be used in the firm's signaling strategy and the results provide support for the monitoring role of the board of directors, as proposed by the agency theory.Our empirical analysis is performed on a sample of 246 IPOs issued in the Canadian province of Québec. We find that the creation of an AC at the time of the IPO has no effect on underpricing unless its members are independent and have expertise in financial matters, in which case it decreases significantly the level of underpricing of the IPO. However, we find no significant association between these two governance attributes and the accuracy of forecasts included in prospectuses. This paper examines the role of audit committees (AC) in the initial public offering (IPO) process in a governance environment where AC best practices are well established but their adoption is voluntary. We consider the creation and characteristics of the committee as signals that issuing firms can use to reduce the underpricing often associated with IPOs. We also examine the effect of the committee on the quality of management earnings forecasts included in the prospectus. This paper examines the role of audit committees (AC) in the initial public offering (IPO) process in a governance environment where AC best practices are well established but their adoption is voluntary. We consider the creation and characteristics of the committee as signals that issuing firms can use to reduce the underpricing often associated with IPOs. We also examine the effect of the committee on the quality of management earnings forecasts included in the prospectus. Our empirical analysis is performed on a sample of 246 IPOs issued in the Canadian province of Québec. We find that the creation of an AC at the time of the IPO has no effect on underpricing unless its members are independent and have expertise in financial matters, in which case it decreases significantly the level of underpricing of the IPO. However, we find no significant association between these two governance attributes and the accuracy of forecasts included in prospectuses. Our results suggest that the AC is a credible signal that could be used in the firm's signaling strategy and the results provide support for the monitoring role of the board of directors, as proposed by the agency theory. Our results support the worldwide movement in legislations requiring AC independence and expertise. They stress the importance of the presence of qualified members on the AC with sufficient knowledge of accounting and finance.

Abstract:
This study examines the factors affecting the demand for higher-quality auditors at the time of an initial public offering in a small market characterized by low-litigation risk, government subsidies for companies going public, and the presence of large non-Big Six auditors, namely, the Canadian province of Quebec. Our results, from an analysis of for 212 Quebec IPOs between 1983 and 1997, indicate that the choice of an auditor at the time of an IPO is significantly affected by the company's risk, size, and geographical dispersion. They also suggest that the Quebec audit market is segmented between three types of service providers: the Big Six, the National firms and the Local firms. Local firms audit small local companies with low risk, National firms audit large local companies with moderate risk, and Big Six audit large geographically dispersed companies with high risk.