Audit committee oversight and bank financial reporting quality

Abstract

This study investigates the impact of audit committee oversight on the financial reporting quality of US bank holding companies. To overcome identification concerns, we use Section 165 h of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires publicly traded bank holding companies with assets exceeding $10 billion to have separate audit and risk committees. We utilise a difference‐in‐differences framework where our treatment group comprises bank holding companies that were required to separate audit and risk oversight functions following the introduction of Section 165 h and our control group comprises counterparts that already had separate audit and risk committees prior to the passage of Section 165 h. We estimate the difference in the behavior of treated bank holding companies between the pre‐ and post‐implementation period of Section 165 h with the same difference in the behavior of control group counterparts and find that the separation of audit and risk committees leads to an improvement in financial reporting quality. We attribute the observed improvements in financial reporting quality to the increased focus of audit committees arising from a reduction in the volume and complexity of tasks undertaken following the implementation of Section 165 h.

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

“…Thus, the evidence supports H1 and agrees with prior studies that investigated the effect of audit committee size on audit report lag (Alfraih, 2016;Farumi et al, 2023;Oradi, 2021). Also, the result is consistent with the agency theory prediction that a larger audit committee size may be ineffective in monitoring and scrutinizing firms' financial reporting system due to lesser cohesion and conflict among the committee members (Chronopoulos et al, 2024;Ishak & Nugraha, 2023). Hence, auditors require more time to scrutinize the financial records of companies with larger audit committee size, leading to longer audit report lag.…”

“…This pronouncement implies that the code supports a smaller audit committee size due to its effectiveness in strengthening firms' internal control systems. Based on the agency framework, a smaller audit committee size may be more efficient due to lesser conflict and greater cohesion among members (Chronopoulos et al, 2024;Klein, 2002). This effectiveness associated with a smaller audit committee may ensure careful monitoring, minimize financial misstatements, and reducing audit report lag.…”

“…Audit committee meetings refer to the number of meetings members hold in a particular accounting year (Bazhair, 2022;Ishak & Nugraha, 2023). Audit committee meetings frequency indicates the involvement level of the committee in firms' financial reporting processes (Chronopoulos et al, 2024;Klein, 2002). According to agency literature, frequent meetings may help audit committee members understand firms' internal control strength and financial reporting quality (E. M. Al-Matari, 2019;Alsheikh & Alsheikh, 2023).…”

“…Accordingly, the audit committee is a sub-committee of the board of directors. Its primary purpose is to strengthen firms' internal control system by enhancing the quality of their financial reporting system (Chronopoulos et al, 2024;Musallam, 2020). Effective monitoring from the audit committee may control managers' opportunistic attitude and promote disclosure due to robust scrutiny (Abbas & Frihatni, 2023;Al-ahdal & Hashim, 2022).…”

“…The committee may also mediate between internal and external auditors in the event of disagreements (Abbas & Frihatni, 2023;Baatwah et al, 2015). Further, several studies evaluated the audit committee's role in providing valuable suggestions on external auditors' engagement, and offering expert advice that can remedy internal control deficiencies (Chronopoulos et al, 2024;Mitra et al, 2012). Within this context, it is argued that an audit committee composition with a higher ratio of independent directors and financial experts is more likely to resolve financial reporting lapses due to the crucial advice from these directors (Abernathy et al, 2013;Alsheikh & Alsheikh, 2023;Baatwah et al, 2015).…”