Audit committee voluntary disclosure describing external auditor oversight: Does it reflect higher audit quality?

Abstract

AbstractThis study examines the association between audit committee voluntary disclosures related to external auditor oversight and audit quality of the top US bank holding companies for a period of 10 years. Using manual coding of the voluntary disclosures that target audit committee oversight of the external auditor, we find that audit committees with a higher level of voluntary disclosures delineating activities of external auditor oversight tend to have a higher audit quality. These results are consistent with the view that audit committees play a major role in overseeing the external audit process as was emphasized by the Sarbanes‐Oxley (SOX) Act. In the case of negligence or wrongdoing, audit committees can be sued for breaching due care; thus, voluntary disclosure is a reliable indicator of the audit committee effectiveness and oversight of the audit process. Using voluntary disclosures in the audit committee report, this research provides useful information to shareholders to evaluate the effectiveness of audit committees in monitoring the external audit process while answering previous calls to investigate the audit committee oversight process (and corresponding effect on audit quality) and not just focusing on audit committee characteristics such as size, expertise, experience, meeting frequency, and audit fees.