Do audit committees manage legitimacy through increased voluntary reporting? Evidence from a large-scale textual analysis of audit committee reports
56 Pages Posted: 16 Feb 2018 Last revised: 10 Feb 2023
Date Written: February 5, 2023
Abstract
This study investigates whether audit committees manage legitimacy by voluntarily disclosing their financial reporting and audit oversight activities in the audit committee report. The answer is important because, if true, it would suggest that a regulatory mandate to require expanded audit committee reports may not be necessary. Performing a large-scale textual analysis of approximately 27,000 U.S. companies’ audit committee report disclosures issued between 2006 and 2017, we find that audit committees of larger SEC filers voluntarily increase disclosure of their financial reporting and audit oversight activities following (1) the SEC’s 2015 Concept Release which encouraged greater audit committee disclosure and (2) a company’s announced need to restate its financial statements. However, we do not find a similar increase following disclosed material weaknesses in internal controls or for smaller SEC filers. Our findings indicate that large companies often respond to external demand for additional audit committee disclosure but that a regulatory mandate may improve small company audit committee reporting.
Keywords: audit committee reports, voluntary disclosure, textual analysis, LIWC
JEL Classification: M41, M48
Suggested Citation: Suggested Citation