What do audit committees do? Transparency and impression management

Abstract

Marking a significant step aimed at making governance more transparent the UK requires audit committees (ACs) to publish a report on their activities. Although regulators continue to emphasise the roles of ACs, there is limited evidence on what the AC does in practice. This paper provides evidence on the nature of AC actions as reported in AC reports relating to external audit, internal audit and financial reporting. We use summative content analysis to analyze AC reports of UK FTSE 350 firms and find that AC actions mainly entail reviewing processes and reports and there is limited incidence of them reporting that they have undertaken investigations into auditing and reporting issues. Moreover, what is reported is mainly general and descriptive of process. Our findings highlight the importance of AC reports providing meaningful information rather than engaging in symbolism. ACs can use their reports to signal their substantive monitoring and how they have contributed to improving auditing and reporting quality. The findings also suggest that future research examining the reviewing, investigating and outsourcing activities of boards and ACs can contribute to a better understanding of the governance process and outcomes.

Banks' voluntary disclosure in the audit committee reports, cost of equity and the mediating role of financial analysts

“…The objective is to understand how audit committee reports affect banks' cost of equity and if it is in line with the SEC objective to reduce firms' cost of equity. Our analyses and hypotheses are based on the conjecture that such reports essentially represent impression management by audit committees (Al‐Shaer et al, 2021; Draeger et al, 2021; Sahyoun & Magnan, 2020). The study considers the direct association between audit committee voluntary disclosure and cost of equity, and the mediating effect of financial analysts' characteristics.…”

“…However, three recent studies reveal that audit committee voluntary disclosures can be a vehicle for impression management. Al‐Shaer et al (2021) find that the information disclosed is general and descriptive. They express concern that the voluntary disclosure is used as impression management.…”

“…Expansive disclosures can reduce the cost of equity in case the disclosures provide additional value‐relevant information (Schreder, 2018). However, based on prior research, we consider the audit committee voluntary disclosure as impression management (Al‐Shaer et al, 2021; Draeger et al, 2021; Sahyoun & Magnan, 2020). Rational investors are expected to consider impression management disclosures as ‘cheap‐talk’ (Merkl‐Davies & Brennan, 2011).…”

“…The report is mainly drafted by audit committees without the influence of management (Braswell & Daniels, 2017). Prior studies investigate the report itself and its compliance with SEC regulations (Carcello et al, 2002; Pandit et al, 2006; Rezaee et al, 2003), the audit committee's signalling incentives (Reidenbach, 2013) or the motives underlying voluntary disclosure (Al‐Shaer et al, 2021; Draeger et al, 2021; Sahyoun & Magnan, 2020; Ye, 2018). This study goes beyond the report and its antecedents and analyses its impact on financial markets.…”

“…Although audit committees must report about their activities, there is still much discretion as to the content of such disclosure. The premise underlying the study is that audit committee disclosure is essentially used as a tool to engage in symbolism, restore legitimacy or engage in impression management whenever audit committees do not perform an appropriate oversight, as documented by Al-Shaer et al (2021), Draeger et al (2021) and Sahyoun and Magnan (2020). Hence, if and how such disclosure affects capital markets are still open questions.…”