The effect of audit committee performance on earnings quality

Abstract

Purpose The role of audit committees in ensuring the quality of corporate financial reporting has come under considerable scrutiny due to recent high‐profile “earnings management” cases and the collapse of Enron. The purpose of this paper is to examine the association between the characteristics of audit committees (size, independence, financial expertise, activity, and stock ownership) and earnings restatement – a direct measure of earnings management. Design/methodology/approach Univariate correlations and multivariate statistical analyses are performed. In particular, a multivariate logistic regression model is used. Findings Evidence suggests a negative association between the size of audit committees and the occurrence of earnings restatement. The remaining four audit committee characteristics are not found to have a significant impact on the quality of reported earnings. Research limitations/implications This study focuses on the fiscal year 2000 only. As data become available for more fiscal years, future studies may re‐examine the issue. Originality/value Results of this research provide useful information for the accounting profession, the regulators and corporations on the effective practice of audit committees.