Article2011

The effectiveness of audit committees for low‐ and mid‐cap firms

62 citations0/0 files storedManagerial Auditing Journal

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose The purpose of this paper is to investigate the effectiveness of recommendations made by the Australian Stock Exchange (ASX) relating to audit committees in Australia, and whether they have improved financial reporting quality for low‐ and mid‐cap listed firms. Design/methodology/approach The authors examine the relation between characteristics of the audit committee and financial reporting quality for listed companies not mandated to comply with these requirements, i.e. low‐ and mid‐cap firms. For a sample of 288 firms, the authors regress measures of audit committee independence, expertise and activity and size on alternative measures of earnings management. Findings A significant association is found between all three characteristics and lower earnings management. The significant measure for independence is the proportion of independent directors on the audit committee; for expertise, it is that at least one member of the audit committee has an accounting qualification; and for activity and size, it is the frequency of audit committee meetings. Practical implications The results provide support for the mandatory establishment of audit committees for the top 500 (high‐ and mid‐cap) firms introduced by the ASX and suggest those audit committee characteristics which could improve financial reporting quality for low‐ and mid‐cap firms. Originality/value The paper examines low‐ and mid‐cap firms in order to complement previous similar studies done for high‐cap firms. It identifies the effects on financial reporting quality of voluntarily choosing to have an audit committee and of the choice of audit committee characteristics, in the period after substantial corporate governance reform. It includes a new measure among audit committee characteristics, industry expertise, which is required in Australia and is new to the literature.

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References

2005Performance matched discretionary accrual measures 1995Detecting Earnings Management.2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 2002Audit committee, board of director characteristics, and earnings management 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*2012Detecting Earnings Management 1997An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud 1998The Effect of Audit Quality on Earnings Management*

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