Abstract

http://ssrn.com/abstract=401240
 
 

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Audit Committee Characteristics and the Perceived Quality of Financial Reporting: An Empirical Analysis


Andrew J. Felo


Penn State Great Valley

Srinivasan Krishnamurthy


NC State University

Steven A. Solieri


University of Scranton - Kania School of Management

April 2003


Abstract:     
In this paper, we empirically examine the relationship between two audit committee characteristics - the composition (expertise and independence) and size of the audit committee - and the quality of financial reporting. We show that after controlling for firm size, board composition, a measure of management's commitment to transparency (the existence of an ethics program) and institutional ownership, the percentage of audit committee members having expertise in accounting or financial management is positively related to financial reporting quality. We also find some evidence of a positive relationship between the size of the audit committee and financial reporting quality. However, audit committee independence is not related to financial reporting quality. We also verify that our results are robust across different measures of financial reporting quality. Our results suggest that mandating greater expertise on audit committees rather than simply requiring one expert on the audit committee may be beneficial to investors. In addition, our results also provide weak support for the recommendation of the Blue Ribbon Committee that firms devote significant directorial resources to the audit committee. Given the prior evidence of a negative relationship between financial reporting quality and cost of capital, firms could improve their reporting quality by appropriately structuring their audit committees, thus reducing their cost of capital.

Number of Pages in PDF File: 40

Keywords: audit committee, financial reporting quality, corporate disclosure, board composition

JEL Classification: G34, M41, M43, M44, N41, K22

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Date posted: June 24, 2003  

Suggested Citation

Felo, Andrew J. and Krishnamurthy, Srinivasan and Solieri, Steven A., Audit Committee Characteristics and the Perceived Quality of Financial Reporting: An Empirical Analysis (April 2003). Available at SSRN: http://ssrn.com/abstract=401240 or http://dx.doi.org/10.2139/ssrn.401240

Contact Information

Andrew J. Felo (Contact Author)
Penn State Great Valley ( email )
30 East Swedesford Road
Malvern, PA 19355-1443
United States
610-648-3380 (Phone)
610-725-5224 (Fax)
Srinivasan Krishnamurthy
NC State University ( email )
Raleigh, NC 27695-8614
United States
Steven A. Solieri
University of Scranton - Kania School of Management ( email )
320 Madison Avenue
Brennan Hall, Suite 345
Scranton, PA 18510
United States
570-941-4192 (Phone)
570-941-4826 (Fax)
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