The Influence of Audit Committee Financial Expertise on Earnings Quality: U.S. Evidence
The Icfai Journal of Audit Practice, Vol. 4, No. 3, pp. 8-28, 2007
Posted: 8 May 2006
An audit committee with financial expertise is expected to strengthen the firms' internal control system, and consequently, contribute to reliable and relevant financial reporting. The controversial definition of "financial expert" was intensively commented on before the Securities and Exchange Commission (SEC) stipulated the final rules. In this study, the author examines whether the impact of audit committee's financial expertise on earnings quality as measured by returns-earnings relation varies with the way the "financial expert" is defined. The results indicate that the firms with an accounting-literate professional serving on the audit committee are more likely to have high quality of reported earnings than others without such an expert. In addition, the size of the audit committee with accounting-related expertise has a positive impact on earnings quality. In contrast, the presence of a financial expert under SEC final definition is not significantly related to earnings quality. The results are robust with other influential factors, such as earnings growth, persistence, firm size, and industry specificity, taken into account.
Keywords: audit committee, financial expertise, earnings quality, returns-earnings relation, internal control
JEL Classification: G14, G18, G34, G38, K22, M41, N42
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