No abstract

We investigate whether audit committees use voluntary disclosures to signal the committees’ higher level of involvement in the audit partner-selection process, which contributes to higher levels of audit quality. Audit committees more involved in the partner-selection process should ensure the selection of a more rigorous partner. We test this conjecture by first identifying partners new to audit engagements. We then compare audit quality for companies whose audit committees disclose involvement in the selection of the new partner to those without this disclosure. We find that this disclosure is positively associated with audit quality (measured using discretionary accruals, misstatements, and meeting consensus analyst forecasts by a very small margin). Our results are more salient for complex companies and those with powerful audit committees. These findings highlight that audit committees use their disclosures to signal involvement in the partner-selection process and are relevant to the Securities and Exchange Commission.

Audit committee members must be independent of management to protect shareholder interests. While current regulations restrict audit committee members from holding management positions (i.e., affiliations), studies find that management’s preferences continue to impact audit committee decisions. This motivates analysis of independence threats beyond affiliations. We apply the American Institute of Certified Public Accountants’ conceptual approach to independence and examine the threat of management’s undue influence over audit committee members. Examining the relative tenure of executives and audit committee members, we find that greater management influence is associated with a lower propensity of the auditor to issue a modified going concern opinion to a distressed client. We also find that greater management influence is associated with increased opinion shopping behavior. These findings are consistent with an undue influence threat to audit committee independence. Our results extend the academic literature and inform regulatory concerns on audit committee independence.

Companies are increasingly disclosing earnings announcements prior to the completion of the year-end audit. Earnings that are released before the audit is complete are viewed negatively by investors and are positively associated with restatements and management turnover. We examine the role of the audit committee in the timing of earnings announcements. We predict and find that more powerful audit committees are positively associated with earnings announcements issued closer to audit completion. For observations with incomplete audits, we find that more powerful audit committees are negatively associated with restatements. Finally, more powerful audit committees are associated with delays in the earnings announcement. Our primary results are robust to the use of an entropy-balanced control sample and company fixed effects. These results indicate that audit committees play a role in earnings announcement timeliness and reliability, and have implications for researchers, investors, and regulators.

We examine how internal control effectiveness influences the audit completeness of earnings announcements and the consequences on earnings reliability. One of the intentions of the Sarbanes Oxley Act of 2002 (SOX) was for internal controls to improve financial reporting. While we show that effective internal controls directly reduce earnings announcement revisions as SOX would intend, we also find evidence that it provides management with the confidence to release their earnings disclosure earlier (with a less complete audit), indirectly increasing the likelihood of earnings announcement revisions. As a result, the beneficial impact of internal control effectiveness on earnings reliability is significantly undermined in a regulatory environment where companies are permitted to disclose preliminary earnings to the public. Our study provides important insights for regulatory policymaking and for accounting practitioners who are responsible for producing reliable financial disclosure.