Audit Committee Attributes and Readability of Financial Statement Footnotes

Iranian Journal of Accounting, Auditing and Finance

مقاله 2، دوره 3، شماره 2، مرداد 2019، صفحه 43-63   

نوع مقاله: Original Article

شناسه دیجیتال (DOI): 10.22067/ijaaf.v3i2.88794

نویسندگان

Shaban Mohammadi^{* 1}؛ Nader Naghshbandi²

¹Department of Accounting, Shahid Rajaee Faculty, Vocational University of Khorasan, Khorasan, Iran

²Department of Accounting, Hakim Nezami institution of higher education Quchan, Quchan, Iran

چکیده

Purpose: The purpose of this study was to investigate the relationship between audit committee attributes and readability of financial statement footnotes of companies listed in the Iranian Stock Exchange.
Method: The statistical population of this study included all companies listed in Tehran Stock Exchange over a period of 7 years from 2012 to 2018. A systematic elimination method has been used for sampling. Multivariate regression and EViews software were used to test the research models.
Results: The results showed a significant relationship between the independence of the audit committee and the readability of financial statement footnotes. There was also a significant relationship between the number of audit committee meetings and the readability of financial statement footnotes. However, there was no significant relationship between the financial expertise of the audit committee and the readability of financial statement footnotes.
Value: Companies with less readable financial statements are more likely to commit fraud than other companies. The readability of financial reporting plays an important role in enhancing the predictability of fraud in the financial statement. By using sophisticated and lengthy disclosures, managers keep some of their intended information secrets from investors and other stakeholders to avoid disclosing information about their bad news or performance. The results of this study can be applicable for shareholders and investors; securities exchange; universities and research institutes; suppliers of goods and services, and the government. There have also been made very limited efforts, especially in Iran, to investigate the relationship between audit committee attributes and readability of financial statement footnotes, so we address this topic in the present study.

کلیدواژه‌ها

Keywords: audit committee size؛ audit committee financial expertise؛ financial statement footnote readability؛ audit committee meetings

مراجع

Abernathy, J.L. Beyer, B. Masli, A. and Stefaniak, C. (2014). The association between characteristics of audit committee accounting experts, audit committee Chairs, and financial reporting timeliness, Advance in Accounting, 30(2), 283-297. https://doi.org/10.1016/j.adiac.2014.09.001

Abernthy, j. Herrmann, D. Kang, T. and Krishnan, G.V. (2013). Audit Committee Financial Expertise and Properties of Analyst Earnings Forecasts. Journal of Advance in Accounting, 29(1), 1-11. https://doi.org/10.1016/j.adiac.2012.12.001

Abbott, L. Parker, S. and Peters, G. (2004). Audit Committee Characteristics and Restatements. Auditing: A Journal of Practice &Theory, 23(1), 69-87. Doi: 10.2308/aud.2004.23.1.69

Alves, S. (2013). The impact of audit committee existence and external audit on earnings management Evidence from Portugal. Journal of financial reporting and accounting, 11(2), 143-165. https://doi.org/10.1108/JFRA-04-2012-0018

Allegrini, M. and Greco, G. (2011). Corporate boards, audit committees and voluntary disclosure: evidence from Italian Listed Companies. Journal of Management and Governance, 17(1), 187-216. http://hdl.handle.net/10.1007/s10997-011-9168-3

Abbott, L.J. Park, Y. and Parker, S. (2000). The Effects of Audit Committee Activity and Independence on Corporate Fraud. Managerial Finance, 26(11), 55–67. https://doi.org/10.1108/03074350010766990

Al-Matari1.Y., Sulaiman.A.S.M, and Al-Matari.E.M. (2017). Audit Committee Activities and the Internal Control System of Commercial Banks Operating in Yemen. International Review of Management and Marketing, 7(1), 191-196. https://www.econjournals.com/index.php/irmm/article/view/2899

Atef, O. and Neila, B.T. (2018). Audit committee effectiveness and financial reporting timeliness: The case of Tunisian listed companies. African Journal of Economic and Management Studies, 9(1), 34-55. https://doi.org/10.1108/AJEMS-11-2016-0163

Akeel, M.L. and Dennis, W.Y. (2012). Governance Characteristics and Role Effectiveness of Audit Committees. Managerial Auditing Journal, 27(4), 336-354. https://doi.org/10.1108/02686901211217969

Abbott, L.J. and Parker, S. (2000). Audit Committee Characteristics and Auditor Selection. Auditing: A Journal of Practice & Theory, 19(2), 47-66. Doi: 10.2308/aud.2000.19.2.47

Alzeban, A. and sawan, N. (2015). The impact of audit committee characteristics on the implementation of internal audit recommendations. Journal of International Accounting, Auditing, and Taxation, 24, 61– 71. https://doi.org/10.1016/j.intaccaudtax.2015.02.005

Amer, M. Ragab, A.A. and Shehata, Sh.E. (2014). Audit Committee Characteristics and Firm Performance: Evidence from Egyptian Listed Companies. Proceedings of 6th Annual American Business Research Conference 9. Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1- 922069-52-8.

Archambeault, S. Todd DeZoort, F. and Dana, R.H. (2008). Audit Committee IncentiveCompensation and Accounting Restatements. Contemporary AccountingResearch, 25 (4), 965-992. https://doi.org/10.1506/car.25.4.1

Baxter, P. and Cotter, J. (200 ). Audit committees and earnings quality. Accounting and Finance, 49(2), 267-290. Doi:10.1111/j.1467-629X.2008.00290.x

Beasley, M.S. (1996). An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud. The Accounting Review, 71(4), 443-465. https://www.jstor.org/stable/248566

Bansal, N. and and Sharma, A.K. (2017). Audit Committee, Corporate Governance, and Firm Performance:Empirical Evidence from India. International Journal of Economics and Finance, 8 (3), 103-116. Doi: 10.5539/ijef.v8n3p103

Baxter, P. and Cotter, J. (2009). Audit committees and earnings quality. Accounting and Finance, 49(2), 267-290. https://doi.org/10.1111/j.1467-629X.2008.00290.x

Bedard, J. Chtourou, S.M. and Courteau, L. (2004). The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management. Auditing: A Journal of Practice & Theory, 23(2), 13–35. https://doi.org/10.2308/aud.2004.23.2.13

Boubaker, S. and Gounopoulos, D. and Rjiba, H. (2018).Annual Report Readability and Stock Liquidity. Financial Markets, Institutions & Instruments, 28(2), 159-186. https://doi.org/10.1111/fmii.12110

Braiotta, L. (2000). The Audit Committee Handbook. Second edition. NY: John Wiley & Sons, Inc.

Braiotta, L. and Zhou, J. (2006). An exploratory study of the effects of the Sarbanes–Oxley Act, the SEC and United States Stock Exchange(s) rules on audit committee alignment. Managerial Auditing Journal, 21(2), 166–190. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2926062

Brick, I.E. and Chidambaran, N.K. (2010). Board meetings, committee structure, and firm value. Journal of Corporate Finance, 16(4), 533–553. https://doi.org/10.1016/j.jcorpfin.2010.06.003

Beck, M.J. and Mauldin, E.G. (2013). Who's really in charge? Audit committee versus CFO power and audit fees. The Accounting Review, 89(6), 2057-2085. Doi: 10.2308/accr-50834

Bull, I. and Sharp, F. (1989). Advising clients on Treadway audit committee recommendations. Journal of Accountancy, 167(2), 46–52. https://www.semanticscholar.org/paper/Advising-clients-on-Treadway-audit-committee-Bull Sharp/0b21d81e85894ceace92fadaef4221215f9f1cba

Bloomfield, R.J. (2002). The “incomplete revelation hypothesis” and financial reporting. Accounting Horizons 16: 233-243.

Bouaziz, Z. (2012). The Impact of the Presence of Audit Committees on the Financial Performance of Tunisian Companies. International Journal of Management & Business Studies, https://ideas.repec.org/p/pra/mprapa/42175.html

Chang, J.C. and Sun, H.L. (2009). Crossed-listed foreign firms' earnings informativeness, earnings management and disclosures of corporate governance information under SOX. The International Journal of Accounting, 44(1), 1–32. https://doi.org/10.1016/j.intacc.2008.12.004

Carcello, J. Hollingsworth, C. and Neal, T. (2006). Audit committee financial experts: Acloser look using firm designations. Accounting Horizons, 20(4), 351–373. https://doi.org/10.2308/acch.2006.20.4.351

Carcello, J.V. and Neal, T.L. (2000). Audit Committee Characteristics and Auditor Reporting. The Accounting Review, 75(4), 453-467. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=53917

Carcello, J.V. and Neal, T.L. (2003). Audit Committee Characteristics and Auditor Dismissals Following New Going Concern Reports. The Accounting Review, 78(1), 95-117. https://www.jstor.org/stable/3203297

Cohen, D.A. and Zarowin, P (2008), Economic consequences of real and accrual-based earnings management activities, New York University. https://www.semanticscholar.org/paper/Economic-Consequences-of-Real-and-Accrual-Based-Cohen-Zarowin/07ed2d640f753d1c207b9864a1f50fd194bb437c?p2df

Dhaliwal, D. Naiker, V.C. and Navissi, F. )2010(. The association between accruals quality and the characteristics of accounting experts and mix of expertise on audit committees. Contemporary Accounting Research, 27 (3): 787-827. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1548766

DeZoort, F.T. Hermanson, D.R. and Houston, R.W. (2003). Audit Committee Support for Auditors: The Effects of Materiality Justification and Accounting Precision. Journal of Accounting and Public Policy, 22(2), 175–99. https://doi.org/10.1016/S0278-4254(03)00007-3

Defond, M.L. Hann, R.N. and Hu, X. (2005). Does The Market Value Financial Expertise on Audit Committees of Boards of Directors?. Journal of Accounting Research, 43(2), 153-193. https://doi.org/10.1111/j.1475-679x.2005.00166.x

Fama, E.F. (1980). Agency problem and the theory of the firm. Journal of Political Economy, 88(2), 288–307. https://www.jstor.org/stable/1837292

Forker, J.J. (1992). Corporate governance and disclosure quality. Accounting and Business Research, 22(86),111-124. https://doi.org/10.1080/00014788.1992.9729426

Farber, D. (2005). Restoring Trust after Fraud: Does Corporate Governance Matter?. The Accounting Review, 80 (2), 539 -561. https://www.jstor.org/stable/4093068

Gabriela. Z. (2017). The Audit Committee Characteristics and Firm Performance: Evidence from the UK. [e-mail] / [e-mail]

Ghosh, A. Marra, A. and Moon, D. (2010). Corporate boards, audit committees, and earnings management: pre and post-SOX evidence. Journal of Business Finance & Accounting, 37(9-10), 1145–1176. https://doi.org/10.1111/j.1468-5957.2010.02218.x

Ginesti, G. Drago, C. Riccardo, M. and Sannino, G. (2018). Female board participation and annual report readability in firms with boardroom connections. Gender in Management: An International Journal, https://doi.org/10.1108/GM-07-2017-0079

Goodwin, J. (2003).The Relationship between the Audit Committee and the Internal Audit Function: Evidence from Australia and New Zealand. International Journal of Auditing, 7(3), 263–78. https://doi.org/10.1046/j.1099-1123.2003.00074.x

Hillman, A.J. and Dalziel, T. (2003). Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives. Academy of Management Review, 28(3), 383–96. https://www.jstor.org/stable/30040728

Hysham, R. Zainuddin, Y.H. and Haron, H. (2014). The relationship between corporate social responsibility disclosure and corporate governance characteristics in Malaysian public listed companies. Social Responsibility Journal, 5(2), 212-226. https://doi.org/10.1108/17471110910964496

Jensen, H.L. and Tang, R.Y.W. (1993). Audits of Collective Bargaining. The Internal Auditor, 50(2), 37–42.

Joseph, V. Carcello, T. and Neal, L. (2003). Audit Committee Characteristics and Auditor Dismissals following “New” Going‐Concern Reports. The Accounting Review, 78(1), 95-117. https://www.jstor.org/stable/3203297

Klein, A. (2002). Audit Committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375-400. https://doi.org/10.1016/S0165-4101(02)00059-9

Khlif, H. and Samaha, K. (2016). Audit committee activity and internal control quality in Egypt: does external auditor’s size matter?. Managerial Auditing Journal, 31(3), 269-289. https://doi.org/10.1108/MAJ-08-2014-1084

Krishnan, G. and Visvanathan, G. (2008). Does the SOX definition of an accounting expert matter? The association between audit committee directors’ accounting expertise and accounting conservatism. Contemporary Accounting Research, 25(3), 827-858. https://doi.org/10.1506/car.25.3.7

Kalbers, L.P. and Fogarty, T.J. (1993). Audit committee effectiveness: An Empirical Investigation of the Contribution of Power. Auditing: A Journal of Practice & Theory, 12(1), 24-49. https://www.semanticscholar.org/paper/Audit-committee-effectiveness%3A-An-empirical-of-the-Kalbers-Fogarty/a23007e8a41f852736f2fb499daa7bdfda87448f

KamelMadi, H. Ishak, Z. and Abdul Manaf, N. (2014). The impact of audit committee characteristics on corporate voluntary disclosure. Procedia - Social and Behavioral Sciences, 164, 486-492. https://doi.org/10.1016/j.sbspro.2014.11.106

Lehavy, R. Li, F. and Merkley, K. (2011). The effect of annual report readability on analyst following and the properties of their earnings forecasts. Accounting Review, 86(3), 1087–1115. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1477392

Li, F. (2008). Annual report readability, current earnings, and persistence. Journal of Accounting and Economics, 45(2-3), 221-247. https://doi.org/10.1016/j.jacceco.2008.02.003

Luo, J. Li, X. and Chen, H. (2018). Annual report readability and corporate agency costs. China Journal of Accounting Research, 11(3), 187-212. https://doi.org/10.1016/j.cjar.2018.04.001

McMullen, D.A. and Raghunandan, K. (1996). Enhancing audit committee effectiveness. Journal of Accountancy, 182(2), 7–81.

Mohamad-Nor, M.N. Shafie, R. and Wan-Hussin, W.N. (2010). Corporate governance and audit report lag in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 6(2), 57–84. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1695085

Nicholson, G.J. and Kiel, G.C. (2003). BoardComposition and Corporate Performance: How the Australian Experience Informs Contrasting Theories of Corporate Governance. corporate governance: An International Review, 11(3), 189-205. https://doi.org/10.1111/1467-8683.00318

Poretti, C. Schatt, A. and Bruynseels, L. (2018). Audit committees independence and the information content of earnings announcements in Western Europe. Journal of Accounting Literature, 40, 29–53. https://doi.org/10.1016/j.acclit.2017.11.002

Persons, O.S. (2009). Audit committee characteristics and earlier voluntary ethics disclosure among fraud and no-fraud firms. International Journal of Disclosure and Governance, 6 (4), 284-297. https://link.springer.com/article/10.1057/jdg.2008.29

Prawitt, D. Smith, J. and Wood, D. (2009). Internal audit quality and earnings management. The Accounting Review, 84 (4), 1255-1280. https://doi.org/10.2308/accr.2009.84.4.1255

Raghunandan, K.R. and McHugh, J.A. (1994). Internal Auditors Independence and Interactions with Audit Committees. Advances in Accounting, 12, 313- 333.

Rittenberg, L. Moore, W. and Covaleski, M. (1999). The Outsourcing Dilemma: What's Best for Internal Auditing?. Inst. of Internal Auditors, Research Foundation, ISBN: 0-89413-384-5

Sanchez, I.M. and Meca, E. (2017). Do financial experts on audit committees matter for bank insolvency risk-taking? The monitoring role of bank regulation and ethical policy. Journal of Business Research, 76, 52-66. https://doi.org/10.1016/j.jbusres.2017.03.004

Soltana, N. (2015). Audit committee characteristics and accounting conservatism. International Journal of Auditing, 19(2), 57-78. https://doi.org/10.1111/ijau.12034

Sun, J. and Lan, G. (2014). Independent Audit Committee Characteristics and real Earnings Management. Managerial Auditing Journal, 29(2), 153-172. https://doi.org/10.1108/MAJ-05-2013-0865

Turley, S. and Zaman, M. (2007). Audit Committee Effectiveness, Informal Processes, and Behavioural Effects. Accounting, Auditing & Accountability Journal, 20(5), 765-788. https://doi.org/10.1108/09513570710779036

Treadway, C. (1987), Report of the National Commission on Fraudulent Financial Reporting. New York Journal, 20(5), 765–88.

Vafeas, N (2005). Audit committees, boards, and the quality of reported earnings. Contemporary Accounting Research, 22. http://hdl.handle.net/11295/77116

Wakaba, R. (2014). Effect of audit committee characteristics on the financial performance of companies listed at the Nairobi securities exchange. REG NO: D61/68129/2011.

Wang, M.C. Lee, M.H. and Chuang, J.J. (2015). Relations among audit committee establishment, information transparency, and earnings quality: evidence from simultaneous equation models. Quality & Quantity: International Journal of Methodology, 50(6), 2417-2431. http://www.springer.com/economics/journal/11135

Wallance, N. and Davidson, X.B. (2004). Market Reaction to Voluntary Announcements of Financial Expertise. Journal of Accounting and public policy, 23(4), 279-293. https://doi.org/10.1016/j.jaccpubpol.2004.06.001

Wallace, W. A. and Kreutzfeldt, R.W. (1991). Distinctive Characteristics of Entities with an Internal Audit Department and the Association of the Quality of such Department with Errors. Contemporary Accounting Research, 7(2), 485-512. https://doi.org/10.1111/j.1911-3846.1991.tb00826.x

Wild, J. (1996). The Audit Committee and Earnings Quality. Journal of Accounting, Auditing, and Finance, 11(2), 247-276. https://doi.org/10.1177/0148558X9601100206

Wilbanks, R. (2017). Audit Committee Oversight of Fraud Risk: The Role of Social Ties, Professional Ties, and Governance Characteristic. The Accounting Review, 31(3), 1-43. https://doi.org/10.2308/acch-51695

Yang, J.S. and Krishnan, J. (2005). Audit committees and quarterly earnings management. International Journal of Auditing, 9(3), 201–219. https://doi.org/10.1111/j.1099-1123.2005.00278.x