Does Audit Committee Reporting Need to Be Improved? Evidence from a Large-Scale Textual Analysis

Draeger, Michelle; Lawson, Bradley P.; Schmidt, Jaime J.

doi:10.2139/ssrn.3118408

Cited by 6 publications

(11 citation statements)

References 49 publications

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“…Two studies follow the SEC proposed disclosures enhancements in 2015. Draeger et al (2018) analyze the audit committee report by conducting a large-scale textual analysis. They find that larger firms disclose more VD than small firms.…”

Section: Literature Reviewmentioning

confidence: 99%

The association between voluntary disclosure in audit committee reports and banks’ earnings management

Sahyoun

Magnan

2020

MAJ

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Purpose This paper aims to examine the relation between voluntary disclosure (VD) in audit committee reports and banks’ earnings management. It investigates whether such disclosure reflects an attempt by audit committees to engage in impression management. Design/methodology/approach The study considers top US bank holding companies from 2006 to 2015. The authors develop a scoring grid to measure VD in audit committee reports. The scoring grid is based on recommendations from 10 industry and governance organizations’ reports that analyzed audit committee disclosures. Multivariate regression analyzes are used in this paper. Findings Descriptive statistics reveal that the level of VD in audit committee reports did not increase significantly from 2006 to 2015. Multivariate analyzes indicate that whenever banks’ level of earnings management is high, audit committees increase the extent of their VDs in their reports. The authors infer from this finding that audit committees are using VDs as a vehicle for impression management. Originality/value This paper sheds light onto the motives behind audit committees’ VDs. The evidence, which is consistent with impression management by audit committees in their report, also provides further background to the Securities and Exchange Commission’s recent initiative to enhance VDs in the audit committee report.

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Section: Literature Reviewmentioning

confidence: 99%

The association between voluntary disclosure in audit committee reports and banks’ earnings management

Sahyoun

Magnan

2020

MAJ

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“…Textual analysis of AC reports is, however, limited and at an early stage. Draeger et al [30] examined the text of AC reports of US firms and found that AC reports typically use a template language that can only provide limited information for supervising external auditors and did not find that AC characteristics were related to the level of disclosure in AC reports [30]. Sahyon and Magnan found that an AC report voluntarily disclosed is merely an impression management tool with no substantive effect [31].…”

Section: Theory and Hypothesesmentioning

confidence: 99%

Audit Committee Disclosure Tone and Corporate Violations in China: Textual Analysis

Guo

2022

Mobile Information Systems

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This study employs text analysis to examine the effect of audit committee reporting, measured by the tone of audit committee disclosures, in predicting the likelihood and frequency of violations. In total, 1,349 companies listed on the Chinese Shanghai Stock Exchange were assessed for this paper from 2014 to 2019. The results suggest that the more active the audit committee’s disclosure tone, the lower the probability and frequency of violations. In addition, the results are robust after controlling for endogenous issues. The further analysis shows that better readability of the text aggravates the negative relationship between the tone of text disclosure and violations. The path analyses show that audit committees predict corporate violations by affecting internal control quality and auditors’ opinions. The results suggest that disclosure of audit committee reporting improves transparency in the activities of audit committees, which plays a positive governance role in indicating corporate violations. Meanwhile, the study provides a reference for further reform of audit committee information disclosure.

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“…In measuring the disclosure tone of AC reports we draw on prior literature that has focused on the textual analysis of financial reports. 6 Various methods have been used to measure qualitative disclosures, such as the naïve Bayesian machine-learning algorithm (Li, 2010), General Inquirer and Diction (Tetlock, 2007;Tetlock et al, 2008;Kothari et al, 2009), and Linguistic Inquiry and Word Count (LIWC) (Li, 2008;Draeger et al, 2019;Smith, 2019). These methods are based on using word dictionaries that have been transferred from the field of social psychology into the finance context (Kang et al, 2018).…”

Section: Ac Reporting Tonementioning

confidence: 99%

“…We are able to identify one unpublished article that focuses on the textual analysis of AC reports. Draeger et al (2019) undertake textual analysis of US firms' AC reports and find that AC reports have become shorter over time and include fewer voluntary disclosures. The study finds no evidence that AC characteristics are associated with the level of disclosure in AC reports.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

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Audit committee disclosure tone and earnings management

Al‐Shaer

Zaman

2021

JAAR

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PurposeThis paper examines the effect of audit committee (AC) reporting, measured by the tone of audit committee disclosures, in improving financial reporting quality as proxied by earnings management.Design/methodology/approachThe authors focus on the textual properties of AC reports, particularly the tone of AC disclosure, and their impact on financial reporting quality proxied using real and accruals-based earnings management. For additional analysis, the authors use a financial reporting index and matched sample. The analysis is based on a sample of UK FTSE 350 firms.FindingsThe analysis suggests that AC reports are not boilerplate but varied in language. The authors find AC reporting is negatively associated with both real and accruals-based earnings management. In our additional tests, the authors find a positive association between financial reporting quality index and reporting tone.Research limitations/implicationsOverall, this paper provides baseline evidence for future research and policy making and reveals that ACs reporting what they have done increases transparency and impacts on reporting quality.Practical implicationsOverall, this paper suggests that the tone of AC reports seems to convey information that affects the communication function of AC reporting and thereby helps to improve reporting quality.Originality/valueThough the importance of AC disclosures in improving reporting quality is well recognised in policy guidelines and governance recommendations, no study has employed computer-based textual analysis of AC reports and investigated the effect of AC disclosure tone and the role it can play in achieving higher reporting quality.

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Does Audit Committee Reporting Need to Be Improved? Evidence from a Large-Scale Textual Analysis

Cited by 6 publications

References 49 publications

The association between voluntary disclosure in audit committee reports and banks’ earnings management

The association between voluntary disclosure in audit committee reports and banks’ earnings management

Audit Committee Disclosure Tone and Corporate Violations in China: Textual Analysis

Audit committee disclosure tone and earnings management

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