Overseeing the External Audit Function: Evidence from Audit Committees’ Reported Activities

• In Event: Plenary

Abstract

Although one of the most crucial responsibilities of audit committees is overseeing the audit process we know very little about how audit committees fulfill this role and how their oversight impacts the financial reporting process and investor perceptions. Recently, in response to calls for more transparency, many firms have increased their disclosure of information about audit committee activities related to their role in overseeing the external audit process. Using a novel dataset that summarizes reported audit committee activities, we create a composite measure that captures the extent of the audit committee’s oversight of the audit process. We then examine whether the extent of audit committee oversight is related to financial reporting quality, audit fees and whether it is informative to investors in capital markets. Our results show that firms with audit committees who take a more active role in overseeing the external auditor are associated with better financial reporting quality and pay higher audit fees. Further, we report limited evidence that the market reacts positively to disclosures regarding the audit committees’ activities consistent with the oversight improving financial reporting quality. Our results provide important insights to the oversight role of audit committees on financial reporting and the market perception associated with active audit committees.

Authors

• Brian Bratten, University of Kentucky

• Monika Causholli, University of Kentucky

• Valbona Sulcaj, University of Kentucky