Audit Committee Oversight and Financial Reporting Reliability: Are Audit Committees Overloaded?
52 Pages Posted: 13 Aug 2019 Last revised: 16 Mar 2020
Date Written: March 13, 2020
We examine the relation between audit committee (AC) responsibilities and financial reporting reliability. AC responsibilities have increased over time, prompting concerns that overloading ACs with duties unrelated to core financial reporting oversight may impair financial reporting. Using new AC charter-based proxies to measure AC responsibilities, we find that allocating non-core responsibilities to the AC is associated with reduced financial reporting reliability. This association is exacerbated when AC members are busy with multiple board appointments and ameliorated when ACs have more members to execute duties. In contrast, we find that having more core financial reporting-related AC responsibilities is associated with improved financial statement reliability; this association persists even when ACs have very high levels of reporting-related responsibilities. Collectively, our evidence suggests that non-core duties overload ACs and harm reporting reliability but increasing AC duties related to financial reporting does not appear to overload ACs nor detract from financial reporting reliability.
Keywords: Corporate governance, Audit committees, Restatements, Monitoring, Financial reporting quality
JEL Classification: G30, G34, G38, M41
Suggested Citation: Suggested Citation