Determinants of Audit Committee Diligence

The number of audit committee meetings is the only publicly available quantitative signal about the diligence of audit committees, and private sector bodies and Securities and Exchange Commission (SEC) officials have emphasized the need for frequent meetings of the audit committee. Prior research indicates that the number of audit committee meetings is associated with many "good" outcomes related to financial reporting, but there is little empirical evidence related to the determinants of audit committee diligence. In this paper we examine the association between firm characteristics and the number of audit committee meetings as a proxy for audit committee diligence. Our sample includes 319 firms from the S&P SmallCap600 with a December 31, 2003 fiscal year-end. We find that there are more audit committee meetings in firms that (1) are larger, (2) have high outsider block-holdings, (3) are in litigious industries, or (4) have more board meetings. The number of audit committee meetings increases with audit committee size. There is a significant positive relationship between the proportion of accounting experts and the number of meetings, but there is no such association between the proportion of nonaccounting financial experts and the number of meetings; these results also provide some context to the controversy surrounding the SEC's attempts to define "audit committee financial expert." [PUBLICATION ABSTRACT]