Overseeing the External Audit Function: Evidence from Recent Audit Committee Voluntary Disclosures

• In Event: Audit Committees, NFP Internal Auditing, and Bonus Incentives

Abstract

One of the most crucial responsibilities of audit committees is overseeing the audit function and its impact on the financial reporting process, yet we know very little about how audit committees fulfill this role. Recently, in response to investor groups’ calls for more transparency about the audit committee’s work, many firms have increased their disclosure of information about audit committee activities related to their role in overseeing the external audit function. Using a novel dataset that captures the extent of these voluntary disclosures, we create a composite oversight measure that measures the extent of audit committee involvement on overseeing the audit function. We examine whether the extent of oversight is related to financial reporting quality, 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 as measured by discretionary accruals and the likelihood of control weaknesses. Further, investors positively react to audit committee disclosure suggesting that these reports are informative. Our results provide important insights on the debate surrounding additional disclosures related to the audit function.

Authors

• Brian Bratten, University of Kentucky

• Monika Causholli, University of Kentucky

• Valbona Sulcaj, University of Kentucky