The mounting attention given to audit committees following a series of corporate financial reporting failures has resulted in numerous provisions within Sarbanes Oxley Act (SOX hereafter) of 2002. The SOX addresses aspects of the audit committee, including its authority and composition characteristics, but the requirement for minimum meeting frequency for the audit committee member was absent from the final SOX provision despite the recommendations of regulators. Since audit committee activity, or degree of audit committee diligence, is determined by the audit committee itself, we investigate various firm-level and governance attributes that likely influence audit committees choice to meet more often than anticipated. After analyzing a sample of 2,715 firm-year observations spanning fiscal years 1998-2003, we find that audit committee diligence is positively associated with audit committee attributes such as financial expertise, but negatively association with audit committee tenure, suggesting that efficiency gains are enjoyed by audit committees as they become more familiar with firm-specific reporting issues. We also document positive associations between audit committee diligence and both governance and agency cost variables. Finally, we document a significant increase in audit committee diligence in the years following the implementation of the SOX 2002 provisions.

The desire to meet analysts' earnings expectations has driven companies to abandon credible financial reporting by stretching the boundaries of generally accepted accounting principles (GAAP), and even making operational and investment decisions that compromise future financial performance. Although external auditors have made strides in curtailing GAAP‐based earnings management, real earnings management (REM) has been adopted by management who hope to improve reported earnings. Such behavior should be of concern to audit committees (ACs) whose responsibilities extend beyond simple compliance with GAAP, to include ensuring that financial information is credible enough to facilitate risk assessments and to maintain effective internal control systems to monitor the effective use of resources by management to maximize long‐term shareholder wealth. The purpose of this article is to increase awareness about the nature, extent, and consequences of management's use of REM to meet Wall Street expectations. We also discuss company and governance attributes that are associated with REM so that ACs and internal auditors (IAs) are able to identify circumstances in which REM is employed to generate earnings that satisfy Wall Street. Specific techniques to detect REM are provided, as well as disclosure alternatives that the AC may use to assist financial statement users in assessing current‐ and future‐period financial performance. © 2017 Wiley Periodicals, Inc.

Empirical research to date has neglected accounting and external financial reporting among 18th century American charitable institutions. Contemporary understanding of 18th century American practices is supported by evidence relating to commercial transactions primarily among colonial merchants. Our study examines the accounting and financial reporting of the Charleston Orphan House, the first municipal orphanage in America, from its inception in 1790 through its first five years of operations. The institution was established by city ordinance in 1790 which required the institution “to keep a book of fair and regular accounts of all receipts and expenditures which will be subject at all times to the inspection of the Commissioners.” The ordinance charged the orphanage's Committee on Accounts to “audit” its accounts. The City Council required the institution's board chairman to countersign the financial statements in 1792 before subjecting them to a second “audit.” The Orphan House employed a system of account books that recorded and facilitated the reporting of expenditures and sources of funds. Accounting and external reporting may have been legitimizing factors to overcome the “liability of newness” by promoting a sense of propriety and transparency among benefactors.“I visited the Orphan House at which there were one hundred and seven boys and girls. This appears to be a charitable organization and under good management.”[President George Washington, diary entry, Saturday, May 7, 1791]

The issue about disclosing contingent losses arising from lawsuits has been an accounting problem for decades. Prior to 1953, there was no mandate for recording or disclosing such contingencies. In this study, the 307 court cases brought against the Chicago, Rock Island and Pacific Railroad Company during 1903 and 1904 are analyzed to determine the impact of nondisclosure in the annual reports. Despite thirty-nine of these cases involved deaths and fifty concerned injuries to employees or passengers, the simple dollar amount of total litigation does not meet a threshold of materiality. Under current reporting requirements, however, some of these cases would have been disclosed. From the relative size of the amounts in dispute, it does not appear that nondisclosure of contingent losses from lawsuits were significant enough to mislead investors.

The Caterpillar case was the first SEC crackdown on inadequate MD&A. Since Caterpillar, the SEC has stepped up enforcement of MD&A. rules. The authors examine the latest SEC actions which provides insight into what lies ahead.