AAA Spark Meeting of Regions

Audit Committees and Risk Factor Disclosure in the U.S.

• In Event: Accrual Quality

Abstract

Recent changes in regulation have led to the audit committee taking an oversight role of the risk management function within organizations. Over this same time period, the SEC began requiring the disclosure of risk factors in annual and quarterly reports. In this study, we examine whether key characteristics of the audit committee are associated with the quantity and quality of risk factor disclosure. We find that larger audit committees (a proxy for stronger governance) disclose less, but the disclosures are more focused on the effects to firm fundamentals (a measure of quality). In contrast, we find that busy audit committees (with members serving on multiple boards) tend to disclose more information (including being more likely to provide updates), but the disclosure is of lower quality. Similarly, we find that committees with a higher percentage of members with accounting experience tend to disclose more (but lower quality) information, perhaps due to their focus on compliance rather than management of the company. In contrast, committees with a higher percentage of supervisory experience tend to disclose higher quality information. Finally, we find that committees with a higher percentage of legal experience tend to provide lower quality disclosures and are less likely to provide updates. Overall, our results suggest audit committee characteristics are associated with risk factor disclosure practices, and our findings are more nuanced than those from other countries related to governance and risk-related disclosure.

Authors

• Cristina Bailey, University of New Mexico

• Josh Filzen, Boise State University