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

The effectiveness of audit committees for low‐ and mid‐cap firms 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Auditing Journal Emerald Publishing

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

Won Sil Kang; Alan Kilgore; Sue Wright
Managerial Auditing Journal , Volume 26 (7): 28 – Jul 26, 2011
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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
0268-6902
DOI
10.1108/02686901111151341
Publisher site
See Article on Publisher Site

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.

Journal

Managerial Auditing Journal – Emerald Publishing

Published: Jul 26, 2011

Keywords: Australia; Stock exchanges; Financial reporting; Audit committees; Independence; Expertise; Earnings management

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