AUDIT COMMITTEE PERFORMANCE - AN INVESTIGATION OF THE CONSEQUENCES ASSOCIATED WITH AUDIT COMMITTEES

Audit committees have become a major means for companies to monitor th e reliability of the financial reporting process. Despite the increase in support and responsibilities of audit committees, there is little empirical evidence documenting how well they accomplish their objectiv es. The results of studies that examined differences between companies with and without audit committees have been inconclusive, suggesting the need for additional research. This study provides evidence concern ing whether audit committees are associated with a reduced incidence o f errors, irregularities and other indicators of unreliable financial reporting. To determine if the presence of an audit committee is assoc iated with financial reporting reliability, five potential consequence s of audit committees are identified, involving the occurrence of erro rs, irregularities and illegal acts. This study uses the following var iables as measures of these consequences: shareholder litigation alleg ing management fraud, quarterly earnings restatements, SEC actions, il legal acts, and auditor turnover involving an accounting disagreement. Five separate treatment samples are compared to randomly selected con trol samples. Results of random approximation tests support the associ ation between the presence of an audit committee and more reliable fin ancial reporting. For all five financial reporting consequences, the a udit committee variable is significant, even in the presence of other company-specific variables that could affect the quality of financial reporting. These results provide evidence that firms with reliable fin ancial reporting (i.e., the absence of errors, irregularities and ille gal acts) are more likely to have audit committees. These results have implications for regulators, such as the Securities and Exchange Comm ission (SEC) and the various stock exchanges, as they attempt to formu late future corporate governance policy.