Audit Committee Effectiveness and Accounting Conservatism a Test of Lagged Effect

Abstract

This article examines the effect of audit committee effectiveness on two measures of accounting conservatism. In addition, this article also investigates the interaction effect of four endogenous variables (i.e. firm's operating risks, leverage, managerial influence, firm's size) and three exogenous variables on relationship between audit committee effectiveness and two measures of accounting conservatism. A total of 543 sample firms are selected from the Bursa Malaysia for the period from 2004 to 2013. In addition, some information relating to audit committee and auditor quality are collected from firms' annual reports. For data analysis, panel data methodology is employed, and multiple regression analysis technique is used to test the developed hypotheses of this study. Results show that interaction effect of firm's operating risks, managerial influence, external auditor quality and capital market uncertainty found to be significant with two-year-lagged effect on both measures of conservatism. Whereas, the interaction effect of firm's leverage, firm's size and product market completion are found to be insignificant. The findings of this study contribute to the signaling theory, agency theory, reputation theory and accounting conservatism literature with lagged effect in emerging economies settings.