The Triangular Relationship between Audit Committee Characteristics, Audit Inputs, and Financial Reporting Quality

51 Pages Posted: 1 Jan 2014 Last revised: 27 Apr 2016

See all articles by Jae B. Kim

Jae B. Kim

Lehigh University - College of Business & Economics

Benjamin Segal

Fordham University; Hebrew University of Jerusalem

Dan Segal

Interdisciplinary Center (IDC) Herzliyah

Yoonseok Zang

Singapore Management University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2016

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.

Suggested Citation

Kim, Jae Bum and Segal, Benjamin and Segal, Dan and Zang, Yoonseok, The Triangular Relationship between Audit Committee Characteristics, Audit Inputs, and Financial Reporting Quality (April 26, 2016). 2014 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2373341 or http://dx.doi.org/10.2139/ssrn.2373341

Jae Bum Kim

Lehigh University - College of Business & Economics

621 Taylor Street
Bethlehem, PA 18015
United States

Benjamin Segal

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

Hebrew University of Jerusalem

Dan Segal

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Yoonseok Zang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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