Audit committee structure and performance: an empirical investigation of the consequences and attributes of audit committees

Dorothy A. McMullen

doi:10.17918/00009472

In recent years the audit committee has become a major means for companies to monitor the reliability of the financial reporting process. This study provides empirical evidence concerning whether they accomplish this objective and what structural attributes enhance their ability to do so. To determine whether the presence of an audit committee affects the reliability of the financial reporting process, five potential financial reporting consequences of audit committees were developed involving the occurrence of errors, irregularities, and illegal acts. Five separate treatment samples were obtained and compared to randomly selected control groups. Approximate randomization tests were used to determine the association between the presence or absence of audit committees and the occurrence of the five financial reporting consequences. To test the attributes of audit committees that may enhance their ability to improve the reliability of the financial reporting process, a sample of companies with audit committees was partitioned from the treatment and control groups used in the original samples. Six structural attributes were selected for testing based on a theoretical development of the responsibilities and objectives of audit committees. Logistic regression was used to compare the audit committee attributes of companies with and without various types of unreliable financial reporting. Research results support the association between the presence of an audit committee and more reliable financial reporting. For all five financial reporting consequences, the audit committee variable was significant even in the presence of other company specific factors that could affect the quality of financial reporting. Logistic regression results indicate that a higher percentage of outside audit committee members with accounting and legal expertise is associated with higher quality financial reporting. For all five financial reporting consequences, companies with unreliable financial reporting had a lower percentage of CPAs and lawyers on their audit committees than the control companies. There also was evidence (for two of the five consequences) that a higher percentage of outside audit committee members and more frequent meetings are associated with more reliable financial reporting.

Audit committee structure and performance: an empirical investigation of the consequences and attributes of audit committees

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Audit committee structure and performance: an empirical investigation of the consequences and attributes of audit committees

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