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Audit Committee Characteristics and the Perceived Quality of Financial Reporting: An Empirical Analysis

40 Pages Posted: 24 Jun 2003  

Andrew J. Felo

Nova Southeastern University

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Steven A. Solieri

University of Scranton - Kania School of Management

Date Written: April 2003

Abstract

In this paper, we empirically examine the relationship between two audit committee characteristics - the composition (expertise and independence) and size of the audit committee - and the quality of financial reporting. We show that after controlling for firm size, board composition, a measure of management's commitment to transparency (the existence of an ethics program) and institutional ownership, the percentage of audit committee members having expertise in accounting or financial management is positively related to financial reporting quality. We also find some evidence of a positive relationship between the size of the audit committee and financial reporting quality. However, audit committee independence is not related to financial reporting quality. We also verify that our results are robust across different measures of financial reporting quality. Our results suggest that mandating greater expertise on audit committees rather than simply requiring one expert on the audit committee may be beneficial to investors. In addition, our results also provide weak support for the recommendation of the Blue Ribbon Committee that firms devote significant directorial resources to the audit committee. Given the prior evidence of a negative relationship between financial reporting quality and cost of capital, firms could improve their reporting quality by appropriately structuring their audit committees, thus reducing their cost of capital.

Keywords: audit committee, financial reporting quality, corporate disclosure, board composition

JEL Classification: G34, M41, M43, M44, N41, K22

Suggested Citation

Felo, Andrew J. and Krishnamurthy, Srinivasan and Solieri, Steven A., Audit Committee Characteristics and the Perceived Quality of Financial Reporting: An Empirical Analysis (April 2003). Available at SSRN: https://ssrn.com/abstract=401240 or http://dx.doi.org/10.2139/ssrn.401240

Andrew J. Felo (Contact Author)

Nova Southeastern University ( email )

3301 College Avenue
HSBE
Fort Lauderdale, FL 33314
United States
954-262-5279 (Phone)

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Steven A. Solieri

University of Scranton - Kania School of Management ( email )

320 Madison Avenue
Brennan Hall, Suite 345
Scranton, PA 18510
United States
570-941-4192 (Phone)
570-941-4826 (Fax)

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