The effect of audit committee characteristics on financial reporting quality: The moderating role of audit quality in the Netherlands

Abstract

The purposes of this study are to shed light, on the one hand, on the effect of audit committee characteristics, namely independent members in audit committee, a financial expert in audit committee, frequency of meetings and audit committee size on financial reporting quality proxied by real earnings management. On the other hand, it aims to investigate the moderating role of audit quality in the relationship between audit committee characteristics and financial reporting quality. The objective is to contribute to the new evidence on the role of audit committee characteristics towards the financial reporting quality with audit quality as a moderator, particularly the appointment of Big 4 company. This study uses the ordinary least squares (OLS) regression to achieve the research purpose by evaluating the data collected from 90 public listed companies from 2010 to 2019 in the Dutch context. The results state that audit committee characteristics have a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on abnormal operating cash flow and discretionary expenses is not significant. There is also evidence that audit quality positively moderates the audit committee and real earnings management links. Lastly, the findings of this study will help professional accountancy bodies and governments to highlight the relevance of earnings management in safeguarding trustworthy financial information, owners’ wealth and to enhance audit committee characteristics in improving audit quality, especially after the enforcement of the Dutch Corporate Governance Code in 2016.

CEO power, audit committee effectiveness and earnings quality

“…2.2.3 Audit committee effectiveness and earnings quality. Mardessi (2021) documented that audit committees are important mechanisms that improve the quality of financial reports.…”

Relationship between the board of directors and financial performance: Empirical Anecdote

“…The number of independent directors in the audit committee is another parameter of corporate governance which is taken into consideration. The audit committee's presence has a substantial impact; moreover, the independent directors in the audit committee would have a favorable response in the capital market (Boussenna 2020, Masmoudi, 2021. Additionally, Kam, Chan and Li (2008); Oussii and Klibi (2020) have proved that independent directors in the board contribute to the value enhancement of the firm.…”

Board Member with Political Connections, Audit Committee Expertise, Competent Management Team and Timeliness of Financial Reporting: Malaysia Non-Profit Organization Evidence

“…The audit committee is responsible for reviewing all the information contained in the financial report before it is reported to external parties. The expertise of an audit committee in the field of accounting and finance is highly demanded (Hamdan, 2020;Masmoudi, 2021). Baatwah et al (2019) in their study stated that audit committee members with financial expertise can reduce financial reporting delays.…”