Audit Committee Financial Expertise Research Articles

Effects of Audit Committee on Fraudulent Financial Reporting Among Listed Firms in Kenya.

Fraudulent financial reporting poses significant risks to the integrity of financial markets, investor confidence, and the overall economy. As a result, effective corporate governance mechanisms are crucial in mitigating the occurrence of fraudulent activities. The audit committee, as a key component of corporate governance, plays a vital role in overseeing financial reporting and providing assurance on the reliability of financial statements. This paper aims to explore the effects of audit committee characteristics on fraudulent financial reporting of listed firms in Kenya. Specifically, the study assessed the effect of Audit Committee; gender, financial expertise, size and independence on fraudulent financial reporting. The study was anchored on the Fraud Pentagon theory. Explanatory research design and longitudinal research design was employed in this study where secondary panel data was obtained through content analysis from audited financial statements spanning from 2012 to 2021. The study targeted listed firms in Kenya during the study period and only firms that met the inclusion and exclusion criteria were retained. After applying the inclusion/exclusion criteria only 40 firms formed the study population. Data was analyzed using descriptive and inferential statistics with the significance of each independent variable being tested at 95% confidence level. The findings show that Gender (β1 = -.1154, p=.000.05) and Financial expertise (β2 = -.200, p=.000.05), Size (β3 = -.1457, p=.001.05), and Independence (β4 = -.1818, p=.000.05) had negative and significant effect on fraudulent financial reporting on firms in Kenya. Thus, the study concluded that audit committee characteristics such as gender variability, audit committee size, audit committee financial expertise and audit committee independence significantly influence fraudulent financial reported among listed firms in Kenya. Based on the findings, the study recommends enhancing the effectiveness of the audit committee in preventing fraudulent financial reporting, organizations should strive for gender diversity within the committee. This can be achieved by actively seeking and appointing qualified female candidates to the audit committee. Promoting diversity ensures a range of perspectives and experiences, leading to more robust discussions, increased scrutiny of financial reporting practices, and improved decision-making. Secondly, Organizations should prioritize the independence of the audit committee by ensuring that committee members are free from any conflicts of interest and have no direct ties to management. Additionally, Organizations should carefully consider the size of the audit committee to optimize its effectiveness in addressing fraudulent financial reporting. Lastly, Organizations should establish mechanisms for continuous monitoring and evaluation of the audit committee's performance. Regular assessments of the committee's effectiveness in detecting and preventing fraudulent financial reporting can help identify areas for improvement.

Does Institutional Ownership Moderate the Relationship Between Audit Committee Composition and Audit Report Lag: Evidence From Saudi

This research explores the moderating effect of institutional ownership on the relationship between audit committee attributes and audit report lag. The paper sampled data from 102 Saudi non-financial listed firms from 2012 to 2021. The data was analyzed using a fixed effect regression, while the generalized method of moments approach (GMM) was employed for robustness check. The research finding strongly suggests that the audit committee size may increase audit report lag. In contrast, it was found that audit committee independence and financial expertise may reduce audit report lag. In addition, the interaction effect reveals that the impact of audit committee financial expertise and the committee meetings on reducing audit report lag may be higher as institutional shareholding rises. Thus, the outcome validates the agency theory perspective that the active monitoring of institutional investors may shape firms’ internal governance systems. More importantly, the finding implies that firms should prefer a smaller audit size with a higher ratio of independent directors and financial experts to improve financial reporting quality. They should also embrace institutional shareholding to reduce audit report lag. Thus, lowering audit report lag may mitigate information disparity between firms and prospective investors, reducing agency conflicts and boosting firm value.

Audit committee attributes, audit quality and performance of oil and gas companies

Purpose: This study examines the audit committee attributes, audit quality, and financial performance of listed oil and gas companies in Nigeria. Research methodology: Audit committee attributes were measured by audit committee size, audit committee independence, and audit committee financial expertise, and audit quality was measured by audit fees charged by an external auditor. Financial performance is measured in terms of earnings per share. The researcher used secondary data extracted from the ten listed oil and gas firms annual reports, and the accounts were analyzed using Panel Least Square. Results: This study reveals a positive and statistically significant relationship between audit committee independence and earnings per share. It also shows that audit quality moderates audit committee attributes significantly and increases firm performance. This study recommends that maintaining high audit quality within the audit committee is crucial for a firm if it aims to offer increased assurance to investors and stakeholders concerning the precision and dependability of its financial statements. Limitations: This study was limited to listed oil and gas companies in Nigeria ranging from to 2016-2022. Contribution: This study examined factors that can moderate the relationship between audit committees and the financial performance of listed oil and gas companies in Nigeria. One such factor is audit quality, which can potentially enhance or diminish the impact of audit committee effectiveness on financial performance. No study conducted in Nigeria has examined this relationship specifically in the oil and gas sector. This knowledge gap served as the rationale for conducting this study.

Internal control opinion shopping: Does initial audit fee discounting matter?

Both regulators and researchers are concerned that the lowballing of initial year audit fees may impair auditor independence (U.S. Senate 1977, 2002; American Institute of Certified Public Accountants (AICPA), 1978; Securities and Exchange Commission [SEC], 2000; Huang et al. 2015). Using a full sample of 1373 U.S. firm-year observations for which the client’s predecessor auditor reports an adverse SOX Section 404 internal control opinion, we find that in the following year a successor auditor who lowballs audit fees is more likely to issue a clean internal control opinion. The results hold when the predecessor auditors are dismissed, but not when the predecessors resign. We also find that firms are no more likely to succeed in opinion shopping when the proportion of audit committee financial experts is high. In addition, we find internal control opinion shopping occurs with initial fee discounting only in competitive audit markets and the period of a few years following the adoption of SOX (since 2007).

Audit Committee Effectiveness and Earnings Quality: Perception-based Evidence from Uganda

This study aims to (1) determine the association between audit committee effectiveness and earnings quality. (2) examine whether all the audit committee effectiveness attributes such as independence, financial expertise, diligence, resources and authority are significantly related to earnings quality.
 Methodology: The study used a cross-sectional and correlational research design. Data were collected using a survey research instrument from the Chief Finance Officers and Heads of internal audit departments of 136 regulated firms in Uganda. Data were analyzed using the Statistical Package for Social Scientists V.26.
 Findings: The findings indicate that audit committee effectiveness is positive and significantly associated with earnings quality. The study also reveals that amongst all the dimensions of audit committee effectiveness, only audit committee financial expertise has a positive and significant effect on earnings quality in regulated firms in Uganda.
 Research implications/Limitations: This study focused only on regulated firms in Uganda. Future studies could be carried out in unregulated firms in Uganda.
 Originality/Value: The study is one of the few studies that examines earnings quality using a perception-based approach. Also, the study reveals that only audit committee financial expertise explains more variations in earnings quality than the other four dimensions do, in regulated firms in Uganda.

The effect of audit committee financial expertise on earnings management tactics in the post-SOX era

To restore investor confidence and promote the integrity of financial accounting information provided to investors, following the passage of the Sarbanes-Oxley Act (SOX), the SEC adopted two new rules for public firms in early 2003, requiring the disclosure of audit committee financial expertise (ACFE) per SOX 407 and the reconciliation of non-GAAP financial measures to those most comparable in GAAP (Regulation G) per SOX 401(b). Using quarterly filing data in the post-SOX era from March 2003 to December 2016, this study examines the impact of these requirements, with a focus on the effect of ACFE on the main earnings manipulation tactics used to just meet or beat analyst expectations (JUSTMBE). Our study investigates the effects of overall ACFE and its components on three key earnings management tactics, namely, discretionary accruals, real activities management, and non-GAAP financial disclosures. We observe that firms with a higher level of ACFE, particularly accounting and finance expertise, exhibit a lower propensity to JUSTMBE. Furthermore, we posit that two upward earnings manipulations, accrual-based and real activities management, are significantly mitigated by ACFE through a complementary effect of its accounting and supervisory expertise components. However, we identify a clear strategic shift in which non-GAAP financial disclosures with unexpected exclusions become a popular alternative tactic for managers to JUSTMBE under the increasing presence of ACFE. This study provides empirical evidence with implications for regulators to consider more rigorous intervention and regulation on non-GAAP disclosures and to refine the requirement of audit committee financial experts with an emphasis on the complement of accounting and non-accounting financial expertise to effectively curtail earnings manipulation.

PENGARUH KARAKTERISTIK KOMITE AUDIT TERHADAP BIAYA MODAL EKUITAS

The aim of this research is to examine and obtain evidence regarding the relationship between audit committee characteristics and the cost of equity capital in the banking sector. The dependent variable in this research is the cost of equity and is calculated using the earning price approach method. The independent variables in this research are the characteristics of the audit committee which consist of size, financial expertise, frequency of meetings, proportion of the audit committee that is female and tenure. Then what was used as a sample in this research were banking companies listed on the Indonesia Stock Exchange during the 2015-2021 period with several sample criteria which were determined at the beginning of the research so that the number of observations used in this research was 98 observations with a total of 18 companies. . The research results prove that the size of the audit committee, the frequency of audit committee meetings and the tenure of the audit committee have a positive influence on the cost of equity capital. The audit committee's financial expertise has no influence on the cost of equity capital. The proportion of the audit committee that is female has a negative influence on the cost of equity capital.

The surprising role of audit committee financial experts and the need for more of them to combat financial corruption

PurposeThe purpose of this research is to examine the impact of audit committee financial experts on the risk of financial corruption in public companies.Design/methodology/approachA time-lagged, matched-pairs sample of 352 corporations was utilized to test the study's hypotheses (176 financially corrupt firms plus 176 compliant firms). To uncover financially corrupt firms, 2,895 Accounting and Auditing Enforcement Releases from the Securities and Exchange Commission were thoroughly evaluated.FindingsThe results show that financial experts on audit committees generally increased financial corruption. However, the impact was reversed when audit committees had three or more financial experts, showing that having at least three financial experts reduced financial corruption.Originality/valueThe study's findings call into question the long-held practice of appointing at least one financial expert to audit committees. This study offers a novel approach to improve corporate oversight and reduce financial corruption by having at least three financial experts on audit committees.

Board composition, audit committee characteristics, and R&D expenditure

We examine the impact of board members’ expertise, chief financial officer (CFO) board membership, and audit committee characteristics on the level of research and development (R&D) expenditure. Using a sample of listed companies from 16 European countries over the period from 2014 to 2020, multivariate regression models and controls for endogeneity, our results show that firms with a CFO who serves as a board member reduce R&D expenditures, while enhanced board expertise has the opposite effect. We also find that audit committee financial expertise is positively associated with the level of R&D spending, while the independence of audit committee members reduces the propensity of firms to exhibit R&D expenditures. These results contribute to the academic and policy debate by offering novel insights into which combinations of corporate governance characteristics are more likely to affect variations in the level of R&D expenditure among firms.

THE EFFECT OF FINANCIAL AND CORPORATE GOVERNANCE FACTORS ON THE FORCED FINANCIAL RESTATEMENT LIKELIHOOD: EVIDENCE FROM MALAYSIA

Background and Purpose: Forced financial restatement (FFR) creates a major concern as it has an instantaneous and disastrous effect on a firm’s share price. Whilst studies focusing on FFR are limited, this study investigated the financial and corporate governance influences that affect the FFR likelihood within the emerging background of Malaysia. This study aims to provide new evidence and insights to Malaysian regulators in developing strategies to reinforce financial reporting quality.
 
 Methodology: The influences of board independence, political connection, audit committee financial expertise, government-related institutional ownership, family ownership and control, corporate reporting quality, and financial distress on FFR occurrence were investigated. A multivariate logistic model was employed on 4,759 firm-year observations from 2002 until 2012.
 Findings: Findings revealed that aggressive accounting influences the FFR likelihood. Based on the results, the number of independent board directors, the presence of politically connected investors or management, working capital accruals management, real earnings management, and the financial health of the firm amplified the FFR occurrences.
 
 Contributions: This study enriches the body of knowledge on FFR by investigating a wider range of financial and corporate governance factors as possible determinants of FFR.
 
 Keywords: Forced financial restatement, opportunistic, accruals management, real earnings management, Malaysia.
 
 Cite as: Slack, R., Othman, I. W., Stratling, R., Syed-Yusuf, S. N., & Wan Mohd Radzi, W. S. (2023). The effect of financial and corporate governance factors on the forced financial restatement likelihood: Evidence from Malaysia. Journal of Nusantara Studies, 8(TI), 147-176. http://dx.doi.org/10.24200/jonus.vol8issTIpp147-176

Do the educational profile, gender, and professional experience of audit committee financial experts improve financial reporting quality?

Going beyond the mere presence of the audit committee financial experts (ACFEs) within the audit committee, we examine whether the educational profile, gender, and professional experience of ACFEs reduces the extent of earnings management. Using a sample of Chinese listed companies, we find evidence suggesting that ACFEs with postgraduate qualifications and other professional certifications mitigate earnings management. Female ACFEs with postgraduate qualifications are more effective in mitigating earnings management than their male counterparts. Also, the professional experience of ACFEs helps them reduce the extent of earnings management. Results are more pronounced in the case of female ACFEs with more professional experience. In addition, we found that ACFEs working in privately-owned Chinese firms better mitigate earnings management compared to those in state-owned Chinese firms. Overall, our results remain robust after controlling for potential endogeneity problems and using alternative earnings management proxies. Our study provides implications for regulators about necessary policy reforms regarding audit committee composition and recommends that companies appoint female ACFEs in China.

Audit quality and classification shifting: evidence from UK and Germany

PurposeThe authors examine the impact of audit quality (AQ) on classification shifting (CS) among non-financial firms operating in the UK and Germany.Design/methodology/approachThis paper used various audit committee variables (size, meetings, gender diversity and financial expertise) to measure AQ and its impact on CS. The authors used a total of 2,110 firm-year observations from 2010 to 2019.FindingsThe authors found that the presence of female members on the audit committee and audit committee financial expertise deter the UK and German managers from shifting core expenses and revenue items into special items to inflate core earnings. However, audit committee size is positively related to CS among German firms but has no impact on UK firms. The authors also document evidence that audit committee meetings restrain UK managers from engaging in CS. However, the authors found no impact on CS among German firms. The study results hold even after employing several tests.Research limitations/implicationsOverall, the study findings provide broad support in an international setting for the board to improve its auditing practices and offer essential information to investors to assess how AQ affects the financial reporting process.Originality/valueMost CS studies used market-oriented economies such as the USA and UK and ignored bank-based economies such as Germany, France and Japan. The authors provide a comparison among bank and market-oriented economies on whether the AQ has a similar impact on CS or not among them.

The effect of disclosure committees on non-GAAP reporting quality

I examine whether company-implemented disclosure committees help to improve non-GAAP reporting quality. I find that firms with disclosure committees provide higher quality non-GAAP performance metrics and that the exclusions used to calculate their non-GAAP numbers are less persistent for future operating income and operating cash flows. Moreover, I find that firms with disclosure committees are less likely to receive SEC comment letters about non-GAAP disclosure. For firms that receive comment letters about non-GAAP reporting, disclosure committees can help to improve non-GAAP reporting quality. Comparing the influence of audit committees and disclosure committees, I find that audit committee financial experts have stronger monitoring effects than those on disclosure committees. Meanwhile, legal experts on disclosure committees provide similar monitoring compared to audit committees’ financial experts. Finally, the interaction between audit committee financial experts and disclosure committee legal experts produces the strongest effect on non-GAAP reporting quality. In sum, my analyses suggest that disclosure committees can provide important monitoring of non-GAAP reporting.

Internal Audit Function and Financial Statement of Insurance Companies in Nigeria

The survival of any firm is predicated on the efficient functioning of the internal audit constituted by management for safeguarding of the company’s assets. It has been argued that several instances of doctored financial statements of quoted firms in Nigeria abound leading to scandals with dire consequences on investors’ confidence. The study examines the relationship existing between internal audit function and the financial performance of insurance companies in Nigeria. The study made a return on assets as a function of audit committee size, audit committee independence, audit committee financial expertise and firm size. The data culled from the financial statements of selected firms, National Insurance Commission Facts Books and the Nigerian Stock Exchange covers the period 2011-2020. Multiple regression techniques were used to explore the contemporaneous dynamics. The study finds evidence of a significant positive impact of audit committee size, audit committee independence and audit committee financial expertise on financial performance, contrary to the significant negative impact of firm size. Therefore, the paper recommended that the various elements of audit committee characteristics, which include audit committee size, independence, and financial expertise, should be strengthened to enhance financial performance in the insurance sector.

Moderating Effect of Audit Committee Financial Expertise on the Relationship between Audit Quality and Earnings Management of Quoted Consumer Goods Firms in Nigeria

This study examined the moderating effect of audit committee financial expertise on the relationship between audit quality and earnings management among quoted consumer goods companies in Nigeria. Earnings management as dependent variable was proxied by discretionary accruals while audit quality is explained using audit fees and auditor industry specialization.The study adopted Ex post facto research design. Population included all the 21 companies in the consumer goods sector. The study purposively, sampled 17 out of the entire population for the purpose of data collection. The study covered the period 2012 to 2021. Secondary data were extracted from the annual accounts of the companies for the period of the study. The study employed the use of multiple regression technique to analyse the data. The result of the study showed that both audit fees and auditor industry specialization have positive significant relationship with earnings management when moderated by audit committee financial expertise. The study concluded that both variables can be used as determinants of real earnings management when there is a financial expert on the audit committee. From the findings, it was recommended that efforts should be made with respect to legislations to strengthen auditors’ quality in Nigeria by ensuring that audit committee members have financial expertise since it is a viable corporate governance tool towards enhancing reported earnings quality.

Audit Committee and Audit Report Lag: Moderating Role of Ownership Concentration of Listed Consumer Goods Firms in Nigeria

This study examines the moderating role of ownership concentration on the effect of audit characteristics on audit report lag of listed consumer goods firms in Nigeria. The ex-post facto research design was adopted, secondary data was extracted from annual reports and accounts of listed consumer goods firms in Nigeria. The population of the study is twenty-one (21) and the sample size consist of fifteen (15) for ten years (2012-2021). Six (6) companies were flitter out from the study due the technical suspension by NXG during the period of study. Census sample techniques were adopted. PCSEs regression model was employed as technique of data analysis. The findings of the study revealed that the Audit Committee Size (ACS) and Audit Committee Meeting have a positive and significant effect on Audit Report Lag (ARL). Also, the Audit Committee Financial Expertise (ACFE) revealed a positive and insignificant effect on Audit Report Lag (ARL), while the Audit Committee Independence is established to have a negative and insignificant effect on Audit Report Lag (ARL). However, with consideration of moderating role ownership concentration, the Audit Committee Size (ACS) and Audit Committee Meeting (ACM) is found to have significant negative effect on Audit Report Lag (ARL), while the Audit Committee Financial Expertise and Audit Committee Independence are found to have a positive and insignificant effect on Audit Report Lag (ARL). The study concludes that ownership concentration moderates the effect of audit committee on Audit Report Lag. The study recommended that the management of the study firms should continue to sustain the frequency of meetings and size or numbers of the committee in their respective audit committee since the two committee have been empirically proven to have significantly reduced the timeframe of reporting their financial reports.

Investigating earnings management practices and the role of the board and committees in emerging markets: Evidence from Malaysian public companies

AbstractThis study was aims to examine the significant elements of the audit and board committee in predicting earnings management (EM) for the period of 2010–2021. The study population comprised total number of 775 listed firms on Bursa Malaysia's main market. The annual audited financial statements and reports of the listed firms, firm's websites, Bloomberg and the Bursa Malaysia website were used as method of data collection. The analytical method used in the current study was descriptive statistic and GLS methods of panel regression. The findings of this study suggested that firms with effective CG mechanisms such as, audit committee size (AUDSIZ), audit committee financial expertise (AUDFEXPT), remuneration and nomination committee (R&NC), supervisory board size (SBS), mitigates accrual, and REM. However, the findings also indicated that gender composition (CGEND) were found to be ineffective in predicting EM.

KOMITE AUDIT DAN KREDIBILITAS PENGUNGKAPAN CSR: BUKTI DARI PERUSAHAAN PERTANIAN DI BURSA EFEK INDONESIA

This study aims to examine and analyze the influence of independent audit committees, audit committee financial expertise, frequency of audit committee meetings and audit committee gender in increasing the credibility of CSR disclosure: in agricultural companies on the Indonesia Stock Exchange. While the sample in this study used purposive sampling with a total sample of 41. The type of data used in this research is quantitative data in the form of secondary data with collection techniques using documentation. The data analysis technique uses multiple regression and is tested using the t test. The results of this study indicate that independent audit committees, audit committee financial expertise, frequency of audit committee meetings and audit committee gender in increasing the credibility of CSR disclosure: in agricultural companies on the Indonesia Stock Exchange.

Characteristics of the Board of Commissioners, Financial Performance and Audit Quality on Earnings Management

Purpose: To examine the influence of Board of Commissioners Size, Independent Commissioners, Board Financial Expertise, Audit Committee Size, Audit Committee Independence, Audit Committee Basic Expertise in Finance and Accounting, Leverage, KAP Size, and Company Size. The Dependent Variable is Profit Management in manufacturing companies listed on the Indonesian Stock Exchange. Research Methodology: The samples used in this study were 73 manufacturing companies listed on the Indonesia Stock Exchange for the 2018-2020 period, with a total of 219 samples. The analytical tool used to analyze the hypothesis is Eviews 10. Results: The results show that the size of the Board of Commissioners, Independent Commissioners, and Leverage have a positive effect on Earnings Management. The Board of Commissioners' Financial Expertise and KAP Size have no effect on Earnings Management. Audit Committee Size, Audit Committee Independence, Audit Committee Financial Expertise and Company Size have a negative effect on Profit Management. Limitations: This research sample uses manufacturing companies for the 2018-2020 period. Which is relatively small compared to the increase in years and other sectors. Contribution: This research has important implications for preventing or at least being able to detect financial statement manipulation by management which can result in reduced integrity of a financial report.

Effect of Managerial Ownership and Audit Committee Financial Expertise on Earnings Management of Listed Manufacturing Companies in Nigeria

Earnings management research has a long and rich history. However, the effect of managerial ownership and audit committee financial expertise on earnings management is rarely conducted in the developing countries like Nigeria. Therefore, this study examines how managerial ownership and audit committee financial expertise on earnings management of listed manufacturing companies in Nigeria. This study used the Roychowdhury approach to measure real earnings management. Thirty-four (34) manufacturing companies out of seventy-three (73) population that were listed on the Nigerian Exchange (NGX) from 2007 to 2021 was selected as sample size. Data was gleaned from the annual financial reports of the sampled companies for this study. Descriptive statistics, Pearson correlation, and quantile regression analysis are the econometric techniques used to test the analysed data and for hypothesis testing. Results from the study showed that managerial ownership significantly affects real-earnings management. When the effect was moderated by the financial expertise of the audit committee, the effect of ownership structure on real earnings management disappears. The result from the study show that managers of manufacturing firms in Nigeria should be encouraged to own more shares in the companies they manage in order to minimize real earnings management. The evidence can theoretically serve as a solid foundation for regulatory action, notably through improving the alignment of managers' and shareholders' interests. The results from this study have important implications for regulators, who will gain from understanding how managerial ownership affects real earnings management and improve the accuracy of financial reporting. The findings will also help policymakers and academics to understand how managerial ownership affects real earnings management in Nigeria.