Rewarding Audit Committee Members: Does it Influence Diligence and Financial Reporting Quality?

Abstract

An increasing number of Australian companies pay fees to members of audit committees and the amount of such fees is rising. This study examines whether the existence and amount of audit committee fees paid to audit committee members is associated with reduced earnings management through a higher proportion of meetings attended. The results of this study indicate that when audit committee fees are higher, earnings management is reduced through increased meeting attendance. The fact that paying audit committee members higher fees encourages them to attend more audit committee meetings is surprising since audit committee fees, on average, are approximately $6,000 per annum in 2010, an arguably small fraction of the total compensation of directors sitting on the audit committees. The evidence suggests that providing audit committee members with even small amounts of financial rewards can provide incentives for them to exert more diligent effort and thus has a positive effect on audit committee effectiveness, which enhances the audit committee’s role in monitoring financial reporting quality. These results have public policy implications for non-executive directors’ compensation and for mandated disclosure of board committee fees in terms of their quantum.