Audit Committee Chair Monitoring Incentives to Use Voluntary Disclosure in the Audit Committee Report Under High Agency Conflicts

Abstract

This study evaluates whether an association exists between the agency incentives of the audit committee chair and voluntary disclosure of their monitoring activities in their audit committee report. Prior research suggests that a shift toward greater voluntary disclosure in the audit committee report occurred following the passage of the Sarbanes–Oxley Act but does not directly address the determinants of voluntary disclosure. Consistent with agency theory, audit committee chairs signal their duty-specific monitoring activities to shareholders, possibly to protect their reputation and justify their compensation. Within a high-litigation industry, this study provides evidence that audit committee chairs with a greater reputation level (i.e., more public company directorships) provide more concise duty-specific voluntary disclosure when serving companies with high levels of agency conflicts. This provides evidence consistent with efficiency in the market for audit committee chairs. This study also provides evidence that audit committee chairs respond to likely shareholder concerns by providing more concise duty-specific voluntary disclosure when their company has previously restated its financials. Finally, audit committee chairs provide increased voluntary disclosure specifically related to external audit oversight when high agency conflicts exist. As a whole, this contributes to the existing audit committee literature by providing evidence that voluntary disclosure incentives for financial reporting are also important determinants of more qualitative compliance-based reporting in the proxy statement. This has implications for accounting and governance practitioners as voluntary audit committee report disclosure offers shareholders detailed information that they may use in evaluating audit committee monitoring performance.