Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses

Abstract

In this study, we examine whether audit committee accounting expertise helps to promote audit quality by motivating auditors to conduct diligent internal control audits and make appropriate internal control assessments because audit committee accounting expertise safeguards auditors from dismissal following adverse internal control opinions. Among clients with existing and likely internal control material weaknesses (as proxied by future restatements of audited financial statements), we find a greater likelihood of adverse internal control audit opinions when the audit committee has greater accounting expertise (measured by the proportion of accounting experts on the audit committee). Among all clients, we find a lower likelihood of subsequent auditor dismissal following an adverse internal control audit opinion when the audit committee has greater accounting expertise. In further analyses, we find that this lower likelihood of subsequent auditor dismissal occurs when at least two audit committee members possess accounting expertise. We also find some evidence that CFO influence (but not CEO influence) over the audit committee negates the increased likelihood of adverse internal control opinions when internal control material weaknesses likely exist, as well as the decreased likelihood of auditor dismissal following adverse internal control opinions. These findings have important implications for regulators and corporate nominating committees interested in promoting audit committee effectiveness.

The audit committee chair's abilities: Beyond financial expertise

“…They explained their results by arguing that ex‐auditors may improve the monitoring role of the audit committee. Similarly, Lisic, Myers, Seidel, and Zhou (in press) found that the accounting experience of audit committee members improves audit quality by encouraging auditors to better assess internal control. The audit committees with the most accounting experience increased the chances that an auditor would report an adverse internal control audit opinion.…”

Internal control through the lens of institutional work: a systematic literature review

“…On the one hand, some researchers study the effectiveness of the audit committee in light of the growing concern that the main reason for the existence of such committees is symbolic compliance with regulations, rather than fundamental oversight of the financial operations. Lisic et al (2019), Lisic et al (2016), and Bruynseels and Cardinaels (2014), for example, suggest that the expertise of audit committees does not automatically make the quality of the reporting process more reliable, that is, it does not mean that there will be fewer cases with reported material weaknesses. In addition to that, Lisic et al (2016) criticize the way boards and their subcommittees (such as the audit committee), are organized in the United States.…”

The Power of Political Connections: Review on the Impacts of Audit Committee and Corporate Governance

“…Furthermore, independent directors need to protect their reputation by improving the level of monitoring, thus leading to better financial performance. Empirical evidence in Abbott et al (2003) and Lisic et al (2019) refers to audit committee effectiveness by assuming that audit committee independence and expertise has a positive association with audit fees. Given the significant value of the relationship between politics and business, it is important to examine how audit fees are influenced by audit committee characteristics.…”

“…Over the past decade, the role of audit committees has become increasingly significant as high profile corporate scandals, such as Enron and WorldCom, have caused chaotic problems for the credibility of corporate governance. The need for more audit committees has been given attention through the combination of legislation and support through best practice guidelines, while in the post-Sarbanes Oxley Act (SOX) era, the key responsibilities of audit committees have the potential to influence operations, strategy and firm performance (Karim et al 2015 andLisic et al 2019). The issues concerning audit committees and corporate governance have been highlighted in many prior studies to improve financial reporting and audit quality (Neal et al 2009;Cohen et al 2004;Krishnan and Visvanathan 2007;Peasnell et al 2000;Turley and Zaman 2007;Jamil and Nelson, 2011;De Vlaminck and Sarens 2015;Lisic, 2019, Muslih, 2020.…”

“…The need for more audit committees has been given attention through the combination of legislation and support through best practice guidelines, while in the post-Sarbanes Oxley Act (SOX) era, the key responsibilities of audit committees have the potential to influence operations, strategy and firm performance (Karim et al 2015 andLisic et al 2019). The issues concerning audit committees and corporate governance have been highlighted in many prior studies to improve financial reporting and audit quality (Neal et al 2009;Cohen et al 2004;Krishnan and Visvanathan 2007;Peasnell et al 2000;Turley and Zaman 2007;Jamil and Nelson, 2011;De Vlaminck and Sarens 2015;Lisic, 2019, Muslih, 2020. The lack of competency among audit committee members may contribute to a company's financial distress (Simpson and Gleason 1999) and hence, the effectiveness of the audit committee is among the key issues in companies in financial distress.…”