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

Felo, Andrew J.; Krishnamurthy, Srinivasan; Solieri, Steve

doi:10.2139/ssrn.401240

Cited by 173 publications

(149 citation statements)

References 31 publications

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“…Prior research on the association between AC size and disclosure offered mixed results. While Mangena and Pike (2005) found insignificant association between the two variables, Felo et al (2003) found a positive relationship. Based on these mixed arguments, we formulate our eleventh hypothesis as follows:…”

Section: H10 There Is a Positive Relationship Between The Proportionmentioning

confidence: 74%

Determinants of narrative risk disclosures in UK interim reports

Elzahar

Hussainey

2012

The Journal of Risk Finance

285

422

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Purpose -This paper contributes to the existing disclosure literature by examining the determinants of narrative risk information in the interim reports for a sample of UK non financial companies.Methodology -This study uses the manual content analysis to measure the level of risk information in interim report narrative sections prepared by 72 UK companies. It also uses the OLS regression analysis to examine the impact of firm-specific characteristics and corporate governance mechanisms on narrative risk disclosures.Findings -The empirical analysis shows that large firms are more likely to disclose more risk information in the narrative sections of interim reports. In addition, the analysis shows that industry activity type is positively associated with levels of narrative risk disclosure in interim reports. Finally, the analysis shows statistically insignificant impact of other firmspecific characteristics (liquidity, gearing, profitability and cross-listing) and corporate governance mechanisms on narrative risk disclosure.Practical implications -The study's findings have practical implications. It informs investors about the characteristics of UK companies that disclose risk information in their interim reports. For example, the findings shows that narrative risk disclosures is affected by firm size and industry type rather than firms' risk levels (e.g. financing risk measured by the gearing ratio or liquidity risk measured by lower liquidity ratios). Practical implications for managers from these findings are that, in order to keep investors satisfied, companies with high levels of financing and liquidity risks should look at investors' demands for risk disclosure. This will help investors when making their investment decisions.Originality/value -The determinants of narrative risk disclosure in interim reports has not been explored so clearly in prior research and therefore this study is the first of its kind to examine this research issue for a sample of UK companies.

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Section: H10 There Is a Positive Relationship Between The Proportionmentioning

confidence: 74%

Determinants of narrative risk disclosures in UK interim reports

Elzahar

Hussainey

2012

The Journal of Risk Finance

285

422

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“…1 Further, within this body of research, there are papers examining the role that audit committee financial expertise has on auditor independence (Carcello and Neal, 2003), fraud and earnings restatements (Abbott et al, 2004;Agrawal and Chadha, 2005), financial reporting quality 1 See DeFond and Francis (2005) for an excellent summary of the audit research before and after the enactment of SOX. (Felo et al, 2003) and earnings management itself (Xie et al, 2003). The financial expert papers yield different conclusions, primarily because they use different definitions of financial expertise.…”

Section: Introductionmentioning

confidence: 99%

Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management

et al. 2006

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A prime objective of the Sarbanes-Oxley Act and recent changes to stock exchange listing standards is to improve the quality of financial reporting. We examine the associations between audit committee financial expertise and alternate corporate governance mechanisms and earnings management. We find that both accounting and certain types of non-accounting financial expertise reduce earnings management for firms with weak alternate corporate governance mechanisms, but that independent audit committee members with financial expertise are most effective in mitigating earnings management. Importantly we find that alternate corporate governance mechanisms are an effective substitute for audit committee financial expertise in constraining earnings management. Finally, we find either no association or a positive association between financial expertise and real earnings management. Our results suggest that alternate governance approaches are equally effective in improving the quality of financial reporting, and that firms should have the flexibility to design the particular set of governance mechanisms that best fit their unique situations.

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“…More specifically, Xie, Davidson and DaDalt (2003) found that the firms with more audit committee meetings were likely to have less earnings management, while Vafeas (2005) observed that audit committees having more meetings were less likely to report a small earnings increase. In contrast, Felo, Krishnamurthy and Solieri (2003) found that the number of audit committee meetings was not related to the analysts' ranking of financial reporting, while Krishnan (2005) and Yang and Krishnan (2005) observed that the number of audit committee meetings had no impact on the incidence of internal control problems and the level of quarterly earnings management, respectively. Collectively, it seems that audit committee members meeting more frequently would not reduce, and sometimes might enhance, the quality of financial reporting.…”

Section: The Relationship Between Two Audit Committee Characteristicsmentioning

confidence: 88%

“…Felo, Krishnamurthy and Solieri (2003), Xie, Davidson and DaDalt (2003) and Vafeas (2005) found that the number of audit committee members had no impact on the analysts' ranking of financial reporting, the level of earnings management, and the incidence of reporting a small earnings increase or avoiding a negative earnings surprise, respectively, while Yang and Krishnan (2005) observed that greater number of audit committee members was associated with a lower level of quarterly earnings management (signifying a higher quality of financial reporting). In total, it appears that the number of audit committee members, in most cases, had no impact on the quality of financial reporting.…”

Section: The Audit Committeementioning

confidence: 99%

“…More specifically, six studies reported that the accounting expertise was significantly associated with indices of a higher financial reporting quality, 2056 while only one study found no such connection. 2057 With respect to the effect of financial analysis expertise, two studies found that financial analysis expertise had no impact on the indices of financial reporting quality, 2058 while one study reported that financial analysis expertise was related to an index of a higher quality of financial reporting. 2059 As for the effect of supervisory expertise, three studies consistently reported that supervisory expertise had no impact on the indices of financial reporting quality.…”

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confidence: 99%

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Are Independent Directors Effective Corporate Monitors? An Analysis of the Empirical Evidence in the USA and Canada

Lai

2014

SSRN Journal

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This thesis explores whether independent directors in the USA and Canada are effective in holding management accountable by: (1) analyzing how the policy of relying on independent directors developed and operates; (2) introducing the main theoretical critiques of independent directors' monitoring effect; and (3) examining whether empirical studies in the field of management science and financial economics support the policy in both countries of relying on independent directors as corporate monitors.Empirical evidence shows that boards with a majority of independent directors, in some circumstances, were associated with better firm performance (in the post-SOX period) and fulfilled certain board tasks effectively in the United States. Canadian studies, however, have not shown a positive association with improved firm performance. Audit committees composed entirely of independent directors have been effective in ensuring the quality of financial reporting in the United States, but this effect has not been found in Canada. Compensation committees composed fully of independent directors neither constrained the level of executive compensation nor tied CEO pay to firm performance in either country. US firms with an audit committee member who had accounting expertise, rather than financial analysis or supervisory expertise, were associated with a higher quality of financial reporting, while Canadian firms with an audit committee member who has financial expertise, instead of financial literacy, were associated with a similar effect. Studies also showed that independent directors perform better in certain circumstances.Based on empirical evidence, US regulators should consider: (1) changing the current mandatory requirements for an independent board and a completely independent compensation committee to a comply-or-explain requirement; (2) narrowing the qualification of a financial expert to an individual who has accounting expertise; and (3) recruiting independent directors who have two or fewer outside directorships, hold more of the corporation's shares, have lower cost of acquiring corporate information, and have no social connections with the CEO. In Canada, weak evidence of the monitoring effectiveness of independent directors supports the existing comply-or-explain approach. Canadian regulators may only need to require or recommend that at least one audit committee member has financial expertise, instead of only financial literacy.ii

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

Cited by 173 publications

References 31 publications

Determinants of narrative risk disclosures in UK interim reports

Determinants of narrative risk disclosures in UK interim reports

Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management

Are Independent Directors Effective Corporate Monitors? An Analysis of the Empirical Evidence in the USA and Canada

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