Determinants and Consequences of Audit Committee Voluntary Disclosures

• In Event: Break with Research and Education Poster Forum

Abstract

In recent years a variety of stakeholders request more disclosures of audit committees’ activities. In response, audit committees in many large companies have voluntarily enhanced the depth and scope of the disclosures of their activities in the proxy statements. However, controversy arises surrounding whether more disclosures of audit committees’ activities are beneficial to investors. In 2015, the SEC started to seek comments from the public on this issue. I find that companies with more diligent, more active, longer-tenured audit committee members and audit committees with a higher proportion of female members provide more voluntary disclosures of audit committees’ activities. However, audit committees that face higher litigation risk are less transparent about their activities. Also, larger companies that pay higher total auditor fees and expect more future equity financing, and companies that have adopted the majority voting policy for director elections provide more voluntary disclosures of audit committees’ activities. Moreover, I find that audit committee voluntary disclosures are associated with shareholders’ voting on the elections of audit committee director nominees and auditor ratification. However, the significance and directions of the associations vary with the content of the disclosures. Audit committees get more supportive votes in director elections if they discuss their considerations in appointing the external auditor, but there is weak evidence that audit committees get more negative votes in director elections if they discuss how nonaudit services may impact auditor independence or indicate that the evaluation of the external auditor is at least an annual event. Further analysis suggests that the discussion of how nonaudit services may impact auditor independence can lower shareholder dissatisfaction toward audit committees for high nonaudit fee ratios. Also, only when the nonaudit fee ratio is high shareholders are dissatisfied with the disclosure that the evaluation of the external auditor is at least an annual event. Moreover, shareholders are more likely to vote against the auditor ratification if the audit committee indicates that it has shared responsibility for risk oversight, or if the audit committee discusses how nonaudit services may impact auditor independence. Overall, this study can benefit policy makers such as the SEC and PCAOB as well as audit committees.

Author

• Zhongxia Ye, University of Texas-San Antonio