The Triangular Relationship Between Audit Committee Characteristics, Audit Inputs, and Financial Reporting Quality

• Main Authors: KIM, Jae Bum, SEGAL, Benjamin, SEGAL, Dan, ZANG, Yoonseok
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: Audit committees; Audit fees; Industry specialist auditors; Restatements; Endogeneity; Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/1017
• Institution: Singapore Management University

Using the reforms to audit committees mandated by the Sarbanes-Oxley Act of 2002 and the difference-in-difference approach, we examine the impact of changes in audit committee attributes (financial expertise, size, and independence) on firms’ audit inputs and financial reporting quality. Firms directly affected by the reforms experienced a larger improvement in audit inputs (measured by audit fees and the appointment of an industry specialist auditor) and a larger increase in financial reporting quality (measured by restatements of financial reports) relative to firms that were already compliant. Importantly, we find that the decline in restatements is not related to the improvement in audit inputs. This suggests that larger, more independent, and more competent audit committees are better able to detect misstatements or deter opportunistic reporting by management, independent of the level of audit input quality. The results therefore provide justification for the audit committee reforms.