Audit committee characteristics and earlier voluntary ethics disclosure among fraud and no-fraud firms

Abstract

This paper empirically examines specifi c characteristics of an audit committee that could be associated with the likelihood of earlier voluntary ethics disclosure. The sample includes fi rms that were investigated by the Securities Exchange Commission for fraudulent fi nancial reporting before the Sarbanes -Oxley Act ' s ethics rule became effective, and their matched no-fraud fi rms. This study fi nds that the level of voluntary ethics disclosure was very low compared to the current mandatory disclosure. Results based on a logit regression analysis suggest that fi rms which made earlier voluntary ethics disclosure were likely to have a larger and more independent audit committee that met more often, and were less likely to engage in fraudulent fi nancial reporting. These results should help policy-makers, investors and boards of directors focus on these audit committee characteristics, which could be crucial not only to ethics disclosure, but also to the ethical conduct of a fi rm. In particular, results regarding size and meeting frequency highlight how to further improve the effectiveness of an audit committee and the quality of an ethics code not only in the United States, but also in other countries. These characteristics may also indicate a fi rm ' s propensity to make any voluntary disclosures, and may help to explain the differential quality of current mandatory ethics codes in the United States. Additionally, these results should be useful to global investors who desire to use corporate governance criteria for screening stock investments in countries where there are no ethics-code requirements.

Impact of board independence on the quality of community disclosures in annual reports

“…For instance, Abbott et al (2004) suggest that audit committees that meet at least four times annually are more effective in reducing financial reporting re-statements than those with lower meeting frequency. Similarly, Persons (2009) finds that firms with earlier voluntary ethics disclosures are those for which audit committees met at least four times annually, with at least three audit committee members. Carcello (2008) argues that audit committee meeting frequency can be a good measure of audit committee diligence and effectiveness in the monitoring of management activities and calls into question the diligence of an audit committee that rarely meets.…”

“…Although there is a dearth of empirical evidence on the impact of audit committee size on CSR disclosures, the evidence on the impact of audit committee size on disclosures in annual reports is generally mixed. While some studies report no significant relationship (Abbott et al, 2004;Bedard et al, 2004;Mangena and Pike, 2005), some suggest a positive relationship (Forker, 1992;Persons, 2009) and Song and Windram, (2004) report a negative one. Nevertheless, we control for audit committee size following the recommendation of both the Blue Ribbon Committee (1999) and the Smith committee (2003).…”

Audit Committee Characteristics and Earnings Management: The Case of Bahrain

“…Literature on AC has suggested that AC effectiveness essentially functions on AC characteristics (e. g. Persons, 2009;Bédard and Gendron, 2010;Dhaliwal et al, 2010;Li et al, 2012). Therefore, the perfect AC size with the right combination of skills and experience are critical in supporting the AC's ability in detecting and preventing earnings management.…”

Audit committee structure and earnings management in Asia Pacific

“…Many studies have uncovered empirical regularities that audit committee independence enhances the quality of financial reporting. In addition, Abbott, Park, and Parker [2000], Archambeault, DeZoort, and Hermanson [2008] and Persons [2009] show that audit committee independence reduce earnings' management, the likelihood of financial reporting restatement and financial reporting fraud. Furthermore, the likelihood that companies re-ceive a true opinion of their current state is influenced by the number of outside directors in the audit committee [Carcello and Neal 2000;Vera-Muñoz 2005].…”

“…In addition, Abbott, Park, and Parker [2000], Vafeas [2005] and Persons [2009] document that higher level of audit committee activity is significantly related to a lower incidence of financial restatement, or reporting a small earnings' increase, or fraudulent financial reporting. Yang and Krishnan [2005] argue that by meeting frequently, the audit committee will remain informed and knowledgeable about accounting or auditing issues and can direct internal and external audit resources to address the matter in a timely fashion.…”