The Effect of Audit Committee Deliberations on Financial Reporting Quality: Evidence from Audit Committee Minutes

• In Event: Board and Audit Committee Activity and Financial Reporting Quality

Abstract

Using a unique sample of minutes from universities’ audit committee meetings, I examine which audit committee deliberations are associated with financial reporting quality. This is important because audit committees are responsible for overseeing the integrity of the firm’s internal controls over financial reporting, accounting and reporting practices, financial statements, and external auditors. However, little is known about the nature of their deliberations, because this information is not available for publicly-traded companies. In contrast, this information is available for many universities, which are operating more like for-profit entities as the competition for students increases and financial resources become more scarce. I first identify the topics of deliberation contained within these minutes. I then examine which specific audit committee deliberations are associated with the likelihood of severe deficiencies in internal control, my proxy for financial reporting quality. I find that internal audit and financial statements are the two most frequently discussed audit committee topics. The discussions that have the strongest negative association with the likelihood of internal control deficiencies are those that address internal controls, internal audit, and the audit committee charter. These discussions continue to remain significant even after controlling for proxies commonly used to capture audit committee effectiveness. My results provide useful information regarding audit committee deliberations, information that is typically unavailable, and aid our understanding of how audit committees influence the quality of firms’ financial reporting outcomes.

Author

• Michelle Draeger, Colorado State University