The Triangular Relationship between Audit Committee Characteristics, Audit Input, and Financial Reporting Quality

• In Event: Audit Committees and Audit Quality

Abstract

This study uses the exogenously mandated changes to the audit committee by the Sarbanes-Oxley Act of 2002 (SOX) to examine the impact of changes in audit committee attributes (financial expertise, size and independence) on the commitment to audit assurance and the likelihood of financial statement restatements. We identify firms that were affected directly by the reform, and find that these firms experienced a greater improvement in audit inputs and a larger decline in financial statements restatements in comparison to firms that were already compliant with the requirements of the reform. Importantly, we find that the decline in restatements is not related to the improvement in audit inputs. This finding suggests that a larger, more independent and competent audit committee is able to better detect misstatements or to deter management from opportunistic reporting, independent of the level of the commitment to audit assurance. The results therefore provide justification for the audit committee reform.

Authors

• Jae Bum Kim, Singapore Management University

• Benjamin Segal, INSEAD

• Dan Segal, Interdisciplinary Center and Singapore Management University

• Yoonseok Zang, Singapore Management University