The Scope of Audit Committee Oversight and Financial Reporting Reliability: Are Audit Committees Overloaded?

52 Pages Posted: 13 Aug 2019

See all articles by Musaib Ashraf

Musaib Ashraf

University of Arizona, Department of Accounting

Preeti Choudhary

University of Arizona, Eller College of Management

Jacob Jaggi

University of Arizona

Date Written: August 6, 2019

Abstract

Audit committee (AC) responsibilities have been increasing over time, prompting concerns that overloading ACs may impair their effectiveness. Using new measures to capture AC responsibilities based on AC charters, we find that greater AC responsibilities are associated with improved financial statement reliability. Contrary to overload concerns, this association is strongest when ACs have very high levels of responsibilities. Cross-sectional analyses indicate greater AC responsibilities improve financial statement reliability at complex firms, following significant governance lapses, when AC members are capable and experienced, and when ACs also meet often to carry out their oversight duties. Further analysis suggests that our AC responsibility results are driven by duties related to financial reporting while, in stark contrast, allocating responsibilities unrelated to financial reporting to the AC (e.g., risk management) detracts from monitoring effectiveness by decreasing financial statement reliability. The latter is consistent with an overload effect driven by responsibilities that distract the AC from its core financial reporting oversight mandate. Our results inform recent regulatory changes at some exchanges to expand AC oversight.

Keywords: Corporate governance, Audit committees, Restatements, Monitoring, Financial reporting quality

JEL Classification: G30, G34, G38, M41

Suggested Citation

Ashraf, Musaib and Choudhary, Preeti and Jaggi, Jacob, The Scope of Audit Committee Oversight and Financial Reporting Reliability: Are Audit Committees Overloaded? (August 6, 2019). Available at SSRN: https://ssrn.com/abstract=3433389 or http://dx.doi.org/10.2139/ssrn.3433389

Musaib Ashraf

University of Arizona, Department of Accounting ( email )

Tucson, AZ
United States

Preeti Choudhary (Contact Author)

University of Arizona, Eller College of Management ( email )

School of Accountancy
Tucson, AZ 85721
United States

Jacob Jaggi

University of Arizona ( email )

Tucson, AZ 85721
United States

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