Audit Committee Quality and Internal Control: An Empirical Analysis

Abstract

I examine the association between audit committee quality and the quality of corporate internal control. While information on the quality of internal control is not generally available, companies changing auditors are required to disclose any internal control problems that were pointed out by their predecessor auditors. The empirical results are based on a comparison of companies disclosing such internal control problems with a control sample of companies changing auditors but not disclosing internal control problems. Audit committee quality is measured in three dimensions: its size, its independence, and its expertise. The internal control problems are observed at two levels of increasing seriousness: reportable conditions and material weaknesses. The sample time period precedes the effective dates of recent policy changes regarding audit committees. The results indicate that independent audit committees and audit committees with financial expertise are significantly less likely to be associated with the incidence of internal control problems. This is true for both levels of internal control problems. The results are consistent with recent policy emphasis on audit committee independence and expertise.

Corporate governance and company performance across Sub-Saharan African countries

“…The composition and functions of the committee can be used as observable features that influence its effectiveness. Such features include, for example, the independence of the members of the audit committee (Chan and Li, 2008, Krishnan, 2005, Balasubramanian et al, 2010, and the chairperson of the board not being a member/chairperson of the audit committee (South Africa IOD, 2009).…”

An artificial neural network approach for the logistics center location selection

“…The following studies confirming the results of this study. Krishnan (2005) examines the period prior to the enactment of SOX, when internal control problems are only disclosed in 8-Ks filed by firms when changing auditors. With information collected from 8-K filings, she finds that independent audit committees and audit committees with more financial expertise are significantly less likely to be associated with the incidence of internal control problems (Ziaee, 2014).…”

“…Since an entity's internal control is under the purview of its audit (Krishnan, 2005), we investigate the relation between audit quality and internal control weaknesses. In a similar study Imam and Malek (2007) examined the relationship among ownership structure and firms' performance and dividend policy.…”

Do financial expert directors affect the incidence of accruals management to meet or beat analyst forecasts?

“…Farber (2005) finds that firms subject to an SEC enforcement action have fewer financial experts on their audit committees than a control group of similar firms. Similarly, Krishnan (2005) documents that the financial expertise of audit committee members is negatively related to the incidence of internal control problems. Zhang et al (2007) also provide evidence that firms are more likely to be identified with an internal control weakness under SOX if their audit committees have less financial expertise.…”