Audit Committee Characteristics and Financial Misstatement: A Study of the Efficacy of Certain Blue Ribbon Committee Recommendations

50 Pages Posted: 24 Sep 2002

See all articles by Lawrence J. Abbott

Lawrence J. Abbott

University of Memphis

Susan Parker

Santa Clara University

Gary F. Peters

University of Arkansas at Fayetteville

Date Written: March 2002

Abstract

This study addresses the impact of certain audit committee characteristics identified by the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC) on the likelihood of financial misstatement. We examine 41 firms which issued fraudulent reports and 88 firms which restated annual results (without allegations of fraud) in the period 1991-1999, together with matched pairs control groups of similar size, exchange listing, industry and auditor type.

We find that the independence of the audit committee and whether the committee meets at least four times per year exhibit a significant and negative association with the occurrence of financial reporting restatements. We also document a significant positive association between an audit committee that lacks a member with financial expertise and the occurrence of financial reporting restatements. However, only audit committee independence and the lack of financial expertise exhibit a negative (positive) association with financial reporting fraud. Our results underscore the importance of the BRC's first two recommendations, both of which concern audit committee independence. Our results also highlight the need for financial expertise as a means of strengthening the monitoring and oversight role that the audit committee plays in the financial reporting process.

Keywords: Blue Ribbon Committee, Audit Committee, corporate governance, fraud, financial restatements

JEL Classification: G30, G34, M14, M41, M49

Suggested Citation

Abbott, Lawrence J. and Parker, Susan and Peters, Gary F., Audit Committee Characteristics and Financial Misstatement: A Study of the Efficacy of Certain Blue Ribbon Committee Recommendations (March 2002). Available at SSRN: https://ssrn.com/abstract=319125 or http://dx.doi.org/10.2139/ssrn.319125

Lawrence J. Abbott (Contact Author)

University of Memphis ( email )

Department of Accounting
Memphis, TN 38152
United States
901-678-4576 (Phone)
901-678-2685 (Fax)

Susan Parker

Santa Clara University ( email )

Leavey School of Business 500 El Camino Real
Santa Clara, CA 95053
United States
(408) 554-4899 (Phone)
(408) 554-5193 (Fax)

Gary F. Peters

University of Arkansas at Fayetteville ( email )

Sam M. Walton College of Business
Department of Accounting
Fayetteville, AR 72701

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