Voluntary Audit Committee Research Articles

Audit Committee Chair Monitoring Incentives to Use Voluntary Disclosure in the Audit Committee Report Under High Agency Conflicts

This study evaluates whether an association exists between the agency incentives of the audit committee chair and voluntary disclosure of their monitoring activities in their audit committee report. Prior research suggests that a shift toward greater voluntary disclosure in the audit committee report occurred following the passage of the Sarbanes–Oxley Act but does not directly address the determinants of voluntary disclosure. Consistent with agency theory, audit committee chairs signal their duty-specific monitoring activities to shareholders, possibly to protect their reputation and justify their compensation. Within a high-litigation industry, this study provides evidence that audit committee chairs with a greater reputation level (i.e., more public company directorships) provide more concise duty-specific voluntary disclosure when serving companies with high levels of agency conflicts. This provides evidence consistent with efficiency in the market for audit committee chairs. This study also provides evidence that audit committee chairs respond to likely shareholder concerns by providing more concise duty-specific voluntary disclosure when their company has previously restated its financials. Finally, audit committee chairs provide increased voluntary disclosure specifically related to external audit oversight when high agency conflicts exist. As a whole, this contributes to the existing audit committee literature by providing evidence that voluntary disclosure incentives for financial reporting are also important determinants of more qualitative compliance-based reporting in the proxy statement. This has implications for accounting and governance practitioners as voluntary audit committee report disclosure offers shareholders detailed information that they may use in evaluating audit committee monitoring performance.

Voluntary audit committees, auditor selection and audit quality: evidence from Taiwan

PurposeThis study aims to examine the Taiwan setting, where audit partners’ names are presented in the audit report and where audit committee formation is voluntary in the initial stage of audit committee reform. This paper investigates the effects of the formation of voluntary audit committees on the selection of individual audit partners, and, in turn, the audit quality. This contrasts with previous studies investigating the relationship between audit committees and auditor selection at the audit firm level.Design/methodology/approachThis paper samples all of Taiwan’s publicly listed firms for the period 2007–2012 and uses Heckman’s (1979) two-stage estimation model to achieve our objectives.FindingsUsing different characteristics of individual engagement partners as proxies for a higher quality auditor, the main empirical results show that voluntary audit committee formation is positively related to an industry specialist lead partner and a lead partner that has a larger number of clients. In addition, this paper also finds that voluntary audit committee formation has a positive impact on audit quality (proxied by discretionary accruals). The results suggest that the voluntary formation of an audit committee contributes positively to both auditor selection and audit quality. Furthermore, an additional test shows that the main empirical results are robust to a validity threat that firms that have good corporate governance prior to the formation of voluntary audit committees tend to select high-quality audit partners.Originality/valueThe paper contributes to the audit committee literature in the following ways: this paper takes advantage of Taiwan’s unique setting, where forming an audit committee is not compulsory in the initial stage of audit committee reform, to investigate the voluntary audit committee, auditor selection and audit quality; this paper expands on Abbott and Parker’s (2000) study of audit committee characteristics and auditor selection at the audit firm level by examining this relationship at the individual audit partner level; this paper responds to the call by Church et al. (2008) and DeFond and Francis (2005) who propose more studies on audit quality at the individual engagement partner level.

Voluntary Audit Committees and Financial Reporting: Korean Evidence*

AbstractThis study investigates whether and how a regulatory change in the appointment procedure of audit committees affects firms’ choice of an auditor or a voluntary audit committee. It also investigates whether voluntary audit committees improve earnings quality. We find that relatively larger medium‐sized firms with high ownership concentration establish voluntary audit committees to reinforce the control of major shareholders and that these audit committees do not improve financial reporting. Our result that audit committees do not necessarily improve financial reporting calls for policymakers and capital market participants to devote greater attention to audit committee appointments.

Audit Committees and Managerial Influence on Audit Quality: ‘Voluntary’ versus ‘Mandatory’ Approach to Corporate Governance

AbstractThis study provides empirical evidence on how managerial influence to reduce audit quality is moderated by a combination of the audit committee (AC) form and compliance with AC best practice guidelines. There is a negative association between managerial ownership and audit fees; however, the association becomes positive when a voluntary AC follows best practices. Furthermore, the results are robust to the exclusion of industries with large frequency in the sample, the consideration of Korean business groups and recessionary times. The results of this study imply that a voluntary approach to corporate governance, which encourages companies to follow best practice guidelines in the form and composition of the AC, is more effective in controlling management than a mandatory approach. This study contributes to policy making aimed at improving AC effectiveness.

Is Voluntary Disclosure and Audit Committee Characteristic Linked to Earning Informativeness? (Indonesia Listed Manufacturing Company)

Is Voluntary Disclosure and Audit Committee Characteristic Linked to Earning Informativeness? (Indonesia Listed Manufacturing Company)

Audit Fees for the Segments of Non-Listed Auditees in Slovenia

In Slovenia, no auditing company has any dominant influence. Small auditing companies started to decrease audit fees a few years ago, which triggered a spiral of falling audit fees. The argument stated that auditors should not accept very low audit fees due to competition for business. Competing with the audit fee is limited because it can impair auditor independence and reduce the quality of auditing services. We should mention that, in the last ten years, no other scientific research in the field of Audit in Slovenia has been carried out, apart from the research: of the determinants of voluntary audit Committee formation in a two-tier board system of a post-transitional economy; of the audit market concentration for the segments of listed and non-listed auditees; audit fees in 2016; and the impact of the new EU audit regulation. In line with this observation, there are at least three reasons for choosing Slovenia as a relatively new EU country for our research.

Voluntary audit committee characteristics in financially distressed and healthy firms: a study of the efficacy of the ASX corporate governance council recommendations

The aim of this paper is to address the impact of certain audit committee characteristics identified by the ASX Corporate Governance Council on improving the effectiveness of corporate audit committees on the likelihood of financial distress. Using a sample of 155 listed Australian firms, this paper finds support for the argument that the adoption of some, but not all, recommendations concerning the formation of an audit committee is beneficial for firms, which in this paper is reflected in a reduced likelihood of financial distress. In particular, the presence of a financial expert and solely non-executive directors on audit committee are associated with lower financial distress likelihood. By contrast, chairperson duality is significantly positively related to the probability of financial distress

Voluntary Audit Committee Characteristics, Incentives, and Aggressive Earnings Management: Evidence from New Zealand

This study provides initial evidence on the association between voluntary audit committee characteristics, incentives and aggressive earnings management in New Zealand. Our results suggest audit committees comprising independent (non‐executive) directors reduce (increase) the likelihood of aggressive earnings management. Financial expertise is associated with a lower likelihood of aggressive earnings management but only when the expertise is held by independent directors. Greater stock ownership by non‐executive and executive directors serving on the audit committee increases the risk of aggressive earnings management. However, stock ownership by independent directors reduces this risk. Our results show that independent directors serving on other boards are associated with a lower likelihood of aggressive earnings management. Results relating to the New Zealand audit committee regulatory guidelines show that only majority independent directors on the audit committee are associated with the likelihood of aggressive earnings management. We raise potential implications for policy makers in New Zealand.

Determinants of Voluntary Audit Committee Formation in a Two-Tier Board System of a Post-transitional Economy – The Case of Slovenia

This paper investigates the determinants of voluntary audit committee (AC) formation in a setting characterized by: (i) a two-tier board system; (ii) a post-transitional economy. Both factors may affect the system of incentives that influences the decision to form an AC and both factors distinguish this paper from existing studies that are usually done under a unitary-board system in a developed capital market. Only a minority (17%) of companies in our sample had voluntarily established ACs by the time ACs had become mandatory by law. We find that larger firms, firms with larger supervisory boards and firms with less debt (rather than more) are more likely to have voluntarily established an AC. Although the inverse relationship between debt and AC formation contradicts the debt holder–manager conflict it can be explained in the context of a post-transitional economy, where the ownership structure appears not to have stabilized yet and where debt has been used as a means of achieving effective control of firms by insiders.

Accounting conservatism and voluntary corporate governance mechanisms by Australian firms

AbstractThis study examines the relationship between voluntary adoption of selected corporate governance mechanisms and accounting conservatism for a sample of firms listed on the Australian Securities Exchange (ASX) over the 11‐year period prior to the promulgation of the ASX Corporate Governance Council Good Governance Principles and Best Practice Recommendations in 2003. Using four accounting and market‐based accounting conservatism measures, our results provide evidence of both conditional and unconditional conservatism in accounting reporting for Australian firms. We find that voluntary audit committee formation, increasing board independence and decreasing board size are positively associated with unconditional accounting conservatism and negatively related to the degree of conditional conservatism. Our results support the contention that firms voluntarily adopting perceived best practice corporate governance mechanisms employ unconditional accounting conservatism as a complimentary agency control device and are consistent with the observed negative association between the unconditional and conditional forms of accounting conservatism practice.

Does the existence of voluntary audit committees really affect IFRS-required disclosure? The Kuwaiti evidence

The purpose of this article is to investigate the effect of the existence of a voluntary audit committee on the level of International Financial Reporting Standard (IFRS)-required disclosure practices in Kuwait. A multivariate regression model is estimated using Ordinary Least Squares analysis for a sample of 68 Kuwaiti companies listed on the Kuwait Stock Exchange (KSX) at the end of 2007 to test the association between the existence of a voluntary audit committee and the level of IFRS-required disclosure. The study's results indicate that the existence of the audit committee is significantly and positively associated with the level of IFRS-required disclosure. Other factors explaining this association are multiple family members on the board, industry type and leverage. In contrast, the other four independent variables (company size, profitability, company age and ownership diffusion) do not emerge as statistically significant explanations of the IFRS-required disclosures. The findings of the study will help policy makers and practitioners to anticipate that Kuwaiti companies with a higher level of compliance with the IFRS-required disclosures are expected to have an audit committee and a higher level of leverage. In addition, there are significant differences across industries in the level of compliance with the IFRS-required disclosures. It appears that Kuwaiti companies with lower levels of compliance with the IFRS-required disclosures are likely to be dominated by families. Furthermore, as KSX listed companies are not obliged to establish an audit committee, the results of this study show that such committees are important in significantly increasing the level of compliance with mandatory disclosure. Thus, an important implication of this study for the KSX is the need to advise all listed companies and policy makers to make the formation of an audit committee mandatory thereby increasing the level of mandatory disclosure. This study is the first to empirically investigate the effect of the existence of a voluntary audit committee on the IFRS-required disclosures provided by Kuwaiti companies. Furthermore, the findings reinforce the importance of an audit committee for enhancing the level of required disclosure.

Corporate governance and voluntary disclosure in Kuwait

This study investigates the relationship between corporate governance characteristics and voluntary disclosure in the annual reports of 170 Kuwaiti companies listed on the Kuwait Stock Exchange in 2007. We first identified four major corporate governance characteristics: proportion of non-executive directors to total number of directors on the board; proportion of family members to total number of directors on the board; role duality; and a voluntary audit committee. We then used univariate and multivariate regression analyses to examine the relationship between these characteristics and voluntary disclosure in annual reports. Using a self-disclosure index to measure voluntary disclosure, the average level of voluntary disclosure by sample companies is 19 per cent, indicating some improvement over the sample companies in an earlier study by Al-Shammari (2008), who found 15 per cent voluntary disclosure. This result suggests a trend toward more transparency by Kuwaiti companies. The results indicate that only the existence of a voluntary audit committee is significantly and positively related to the extent of voluntary disclosure. The result is robust with respect to controls for company size, leverage, auditor type and industry memberships. These results indicate the need to improve Kuwaiti market transparency through additional constraints on corporate governance characteristics. It is believed that this result will prove useful to regulators, preparers of financial statements and investors. Specifically, users of accounting information like investors may consult the findings to understand Kuwaiti companies better when diversifying their investment portfolios.

An analysis of the factors driving the voluntary creation of audit committees: Evidence in the case of Spain

Following the publication of the Spanish Code of Corporate Good Governance in 1998 (known as the Olivencia Code), some companies voluntarily created audit committees in line with the recommendation that all firms, and especially listed companies, should do so. The aim of this work is to analyse the factors associated with voluntary audit committee formation in companies listed on the Spanish Capital Market through 1999. In particular we analyse factors such as board independence and size, the board chairman/CEO duality, auditor size, agency costs, ownership, economies of scale, institutional investors, the audit report and auditor tenure. We find that voluntary audit committee formation is positively correlated with the proportion of independent directors on the board of directors and economies of scale, while the evidence reveals a non-linear (quadratic) relationship between board size and voluntary audit committee formation. We also formed another sample excluding financial institutions, for which we found that audit committee formation is positively associated with board independence and economies of scale, and negatively associated with the audit report and audit tenure

Voluntary audit committee formation and agency costs

This paper finds that only a small proportion of listed companies in Hong Kong voluntarily establish audit committees prior to the implementation of the revised Code of Best Practice, which effectively mandated them. We show that firms with dispersed ownership, a greater proportion of outside directors, and that have a non-Big Five auditor, are associated with the voluntary adoption of audit committees. The latter result differs from other studies and it suggests that audit committees are a substitute mechanism for the employment of high quality auditors (using the Big Five as a proxy for high quality).

Voluntary Audit Committee Formation and Agency Costs

This paper finds that only a small proportion of listed companies in Hong Kong voluntarily establish audit committees prior to the implementation of the revised Code of Best Practice, which effectively mandated them. We show that firms with dispersed share ownership, a greater proportion of outside directors, and that have a non-Big 5 auditor are associated with the voluntary adoption of audit committees. The latter result differs from other studies and it suggests audit committees are a substitute mechanism for the employment of high quality auditors (using the Big 5 as a proxy for high quality).

Voluntary Audit Committee Formation and Practices among Belgian Listed Companies

In this paper we investigate some factors that are associated with voluntary audit committee formation in a non‐Anglo‐Saxon environment (and where audit committee formation is voluntary, even for listed companies). For those companies that voluntarily instaled an audit committee we also present evidence on their working practices. We use data from Belgian listed companies for that purpose. Consistent with previous Anglo‐Saxon research, we find that voluntary audit committee formation is positively correlated with the proportion of independent directors on the board of directors and external audit‐firm size. Contrary to prior studies, we do not find that agency costs and board size are associated with voluntary audit committee formation. As to working practices, we find that a substantial amount of Belgian‐listed companies do not comply with the recommendations of the Brussels Stock Exchange regarding audit committees, as about 50% of these companies has no audit committee. Those companies that do have an audit committee perform quite well according to the Belgian recommendations, but not according to recently formulated (tougher) US requirements, as they typically do not include a financial expert nor disclose the audit committee charter.

Association between board of director characteristics and the amount of voluntary audit committee disclosures

This study empirically examines the association between certain director characteristics and the extent of voluntary audit committee disclosure in annual reports. Results suggest that Singapore's publicly traded firms are more likely to voluntarily disclose audit committee related information as: the number of board members increases; different individuals occupy the roles of CEO and board chairperson; and the proportion of independent directors serving on the board increases. Findings, however, fail to show any association between the amount of voluntary audit committee disclosure and the percentage of executive directors' ownership. Documented findings are of interest and benefit to various parties including regulators, corporate governance reformists, and corporate management. For instance, findings imply that a positive by-product of implementing major corporate governance reforms currently championed by corporate governance reformists will be an increase in audit committee disclosures. As a result, there will be less pressure on regulators to develop, introduce, and enforce mandatory audit committee disclosures that may be potentially intrusive to a firm's management.

A study of the relationship between corporate governance structures and the extent of voluntary disclosure

The primary objective of this study is to test a theoretical framework relating four major corporate governance attributes with the extent of voluntary disclosure provided by listed firms in Hong Kong. These corporate governance attributes are the proportion of independent directors to total number of directors on the board, the existence of a voluntary audit committee, the existence of dominant personalities (CEO/Chairman duality), and the percentage of family members on the board. Using a weighted relative disclosure index for measuring voluntary disclosure, the results indicate that the existence of an audit committee is significantly and positively related to the extent of voluntary disclosure, while the percentage of family members on the board is negatively related to the extent of voluntary disclosure. The study provides empirical evidence to policy makers and regulators in East Asia for implementing the two new board governance requirements on audit committee and family control.

The incentives for voluntary audit committee formation

This study uses an agency theory framework to analyze the incentives for voluntary formation of audit committees. Empirical variables are chosen to proxy for costs of conflicts of interest between stockholders, bondholders, and managers. Also tested is the influence of size and the incentives of (Big Eight) auditors and directors to establish audit committees. Univariate and multivariate tests are undertaken on 135 firms listed on the New Zealand Stock Exchange. The results indicate that voluntary audit committees are not related to auditor incentive variables or to agency cost variables arising from the separation of (residual) ownership and (decision) control. A relation is found between voluntary audit committee formation and directors' incentives. Both the number of directors on the board and intercorporate ownership were found to be the more important determinants of voluntary audit committees.

Voluntary formation of corporate audit committees among NASDAQ firms

One of the major recommendations of the National Commission on Fraudulent Financial Reporting (NCFFR) was that all public companies be required by Securities and Exchange Commission rules to form audit committees composed exclusively of independent directors. This study investigates why some companies voluntarily form audit committees, while others do not. An agency theory framework is used to analyze the incentives to form audit committees. Based on 1986 data from a random sample of NASDAQ over-the-counter companies, six characteristics are found to be associated with voluntary audit committee formation: 1) lower percentage managerial ownership of the company's stock; 2) higher leverage; 3) larger firm size; 4) a greater proportion of outside directors to total directors; 5) Big Eight auditors; and 6) participation in the National Market System. The results are discussed in relation to the NCFFR's recommendation for mandatory audit committees.