The Triangular Relationship between Audit Committee Characteristics, Audit Inputs, and Financial Reporting Quality
INSEAD Working Paper No. 2012/110/AC
Singapore Management University School of Accountancy Research Paper No. 6
56 Pages Posted: 23 Oct 2012 Last revised: 31 Dec 2013
There are 2 versions of this paper
The Triangular Relationship between Audit Committee Characteristics, Audit Inputs, and Financial Reporting Quality
The Triangular Relationship between Audit Committee Characteristics, Audit Inputs, and Financial Reporting Quality
Date Written: December 30, 2013
Abstract
Using the exogenous reforms to audit committees mandated by the Sarbanes-Oxley Act of 2002 and a difference-in-difference approach, we examine the impact of changes in audit committee attributes (financial expertise, size, and independence) on firms’ audit inputs and financial reporting quality. Firms directly affected by the reforms experienced a larger improvement in audit inputs (measured by audit fees and the appointment of an industry specialist auditor) and a larger increase in financial reporting quality (measured by restatements of financial reports) relative to firms that were already compliant. Importantly, we find that the decline in restatements is not related to the improvement in audit inputs. This suggests that larger, more independent, and more competent audit committees are better able to detect misstatements or deter opportunistic reporting by management, independent of the level of audit input quality. The results therefore provide justification for the audit committee reforms.
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