Does Audit Committee Monitoring Matter in the Government Sector? Evidence from Municipal Internal Control Quality

Abstract

We investigate whether the presence of municipal audit committees is associated with internal control quality in the municipal setting. The evidence shows that only 20% of municipalities in our sample voluntarily maintained an audit committee during the sample period of 2001 through 2004. Our results highlight that municipalities with audit committees are associated with fewer internal control problems, which in turn suggests these cities should be less likely to experience future significant financial reporting failures. These results persist in specifications that use econometric procedures to address concerns about self-selection. Overall, our findings suggest that audit committee presence plays an important role in municipal financial oversight.

Keywords: audit committees, municipal reporting, internal controls