Benchmarking Audit Committee Effectiveness in Financial Reporting

Abstract

This paper examines the effectiveness of UK audit committees in their primary responsibility of overseeing financial reporting. A logit regression approach is used to benchmark corporate financial reporting quality against financial reporting standards in the period from 1991 to 2000. Using a sample of companies that have been subject to adverse rulings by the Financial Reporting Review Panel (FRRP), we test the impact of board and audit committee characteristics on the probability of compliance with financial reporting standards. Our results show that independent boards promote audit committee effectiveness in financial reporting and suggest that director share ownership and multiple directorships could undermine audit committee effectiveness in financial reporting. We also suggest that director financial literacy and an ‘active’ audit committee may contribute to audit committee effectiveness.