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Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses†

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  • Ling Lei Lisic
  • Linda A. Myers
  • Timothy A. Seidel
  • Jian Zhou

Abstract

In this study, we examine whether audit committee accounting expertise helps to promote audit quality by motivating auditors to conduct diligent internal control audits and make appropriate internal control assessments because audit committee accounting expertise safeguards auditors from dismissal following adverse internal control opinions. Among clients with existing and likely internal control material weaknesses (as proxied by future restatements of audited financial statements), we find a greater likelihood of adverse internal control audit opinions when the audit committee has greater accounting expertise (measured by the proportion of accounting experts on the audit committee). Among all clients, we find a lower likelihood of subsequent auditor dismissal following an adverse internal control audit opinion when the audit committee has greater accounting expertise. In further analyses, we find that this lower likelihood of subsequent auditor dismissal occurs when at least two audit committee members possess accounting expertise. We also find some evidence that CFO influence (but not CEO influence) over the audit committee negates the increased likelihood of adverse internal control opinions when internal control material weaknesses likely exist, as well as the decreased likelihood of auditor dismissal following adverse internal control opinions. These findings have important implications for regulators and corporate nominating committees interested in promoting audit committee effectiveness. Les compétences en comptabilité du comité d'audit contribuent‐elles à promouvoir la qualité de l'audit? Données tirées des rapports d'audit sur les faiblesses du contrôle interne Les auteurs cherchent à déterminer si les compétences en comptabilité du comité d'audit contribuent à promouvoir la qualité de l'audit en motivant les auditeurs à soumettre le contrôle interne à un examen vigilant et à une évaluation appropriée, du fait que ces compétences du comité d'audit mettent les auditeurs à l'abri d'une révocation de mandat à la suite de l'expression d'une opinion défavorable à l’égard du contrôle interne. Parmi les clients chez qui des faiblesses importantes du contrôle interne sont observables et probables (ainsi qu'en font foi les retraitements ultérieurs des états financiers audités), les auteurs relèvent une probabilité plus élevée d'opinions défavorables des auditeurs à l’égard du contrôle interne lorsque le comité d'audit possède davantage de compétences en comptabilité (mesurées en fonction de la proportion d'experts comptables membres du comité d'audit). Chez l'ensemble des clients, les auteurs observent une probabilité plus faible de révocation du mandat de l'auditeur à la suite de l'expression d'une opinion défavorable à l’égard du contrôle interne lorsque le comité d'audit possède davantage de compétences en comptabilité. En poussant plus loin les analyses, les auteurs constatent que cette probabilité plus faible de révocation subséquente du mandat des auditeurs est observable lorsqu'au moins deux membres du comité d'audit possèdent des compétences en comptabilité. Ils relèvent également certaines données établissant que l'influence du directeur financier (mais non celle du chef de la direction) sur le comité d'audit inverse la probabilité plus élevée d'opinions défavorables à l’égard du contrôle interne lorsque l'existence de faiblesses importantes du contrôle interne est probable, et inverse la probabilité plus faible de révocation du mandat de l'auditeur à la suite de l'expression d'une opinion défavorable à l’égard du contrôle interne. Ces constats ont d'importantes retombées pour les autorités de réglementation et les comités d'entreprise responsables des nominations qui s'attachent à promouvoir l'efficacité des comités d'audit.

Suggested Citation

  • Ling Lei Lisic & Linda A. Myers & Timothy A. Seidel & Jian Zhou, 2019. "Does Audit Committee Accounting Expertise Help to Promote Audit Quality? Evidence from Auditor Reporting of Internal Control Weaknesses†," Contemporary Accounting Research, John Wiley & Sons, vol. 36(4), pages 2521-2553, December.
  • Handle: RePEc:wly:coacre:v:36:y:2019:i:4:p:2521-2553
    DOI: 10.1111/1911-3846.12517
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    Cited by:

    1. Nurul Nazlia Jamil, 2020. "The Power of Political Connections: Review on the Impacts of Audit Committee and Corporate Governance," Journal of Public Administration and Governance, Macrothink Institute, vol. 10(1), pages 333347-3333, December.
    2. Abdalwali Lutfi & Saleh Zaid Alkilani & Mohamed Saad & Malek Hamed Alshirah & Ahmad Farhan Alshirah & Mahmaod Alrawad & Malak Akif Al-Khasawneh & Nahla Ibrahim & Abeer Abdelhalim & Mujtaba Hashim Rama, 2022. "The Influence of Audit Committee Chair Characteristics on Financial Reporting Quality," JRFM, MDPI, vol. 15(12), pages 1-15, November.
    3. Bai, Jing & Tang, Xuesong & Zheng, Yuxin, 2023. "Serving the truth: Do directors with media background improve financial reporting quality?," International Review of Financial Analysis, Elsevier, vol. 85(C).
    4. Imran Abbas Jadoon & Umara Noreen & Usman Ayub & Muhammad Tahir & Naima Shahzadi, 2021. "The Impact of Family Ownership on Quality and Disclosure of Internal Control in Pakistan," Sustainability, MDPI, vol. 13(16), pages 1-16, August.
    5. Hidaya Lawati & Khaled Hussainey & Roza Sagitova, 2021. "Disclosure quality vis-à-vis disclosure quantity: Does audit committee matter in Omani financial institutions?," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 557-594, August.
    6. Junhui Wang & Jerry Sun, 2022. "The role of audit committees in social responsibility and environmental disclosures: evidence from Chinese energy sector," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(1), pages 113-128, March.
    7. Cheng‐Hsun Lee, 2022. "Non‐generally accepted accounting principles disclosures and audit committee chairs’ external directorships," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 111-139, January.
    8. C. S. Agnes Cheng & Yuan Huang & Sun & Yumiao Yu, 2021. "Geographic location of audit committee chairs and accruals quality: evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1215-1246, November.
    9. Zhe Shen & Haili Li & Norvald Instefjord & Xinming Liu, 2024. "Audit committee equity incentives and stock price crash risk," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1145-1190, April.
    10. Obermire, Kara M. & Cohen, Jeffrey R. & Zehms, Karla M., 2021. "Audit committee members’ professional identities: Evidence from the field," Accounting, Organizations and Society, Elsevier, vol. 93(C).
    11. Ja Eun Koo & Eun Sun Ki, 2020. "Internal Control Personnel’s Experience, Internal Control Weaknesses, and ESG Rating," Sustainability, MDPI, vol. 12(20), pages 1-16, October.
    12. Han, Yuzhu & Yan, Shuo, 2022. "Institutional environment and qualified foreign institutional investors' trust in auditing," International Review of Financial Analysis, Elsevier, vol. 80(C).
    13. Oliver Henk, 2020. "Internal control through the lens of institutional work: a systematic literature review," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 239-273, September.
    14. Liu, Yanmei, 2023. "Managerial ownership and the effectiveness of internal control," Finance Research Letters, Elsevier, vol. 58(PA).
    15. Gopal V. Krishnan & Emma‐Riikka Myllymäki & Neerav Nagar, 2021. "Does financial reporting quality vary across firm life cycle?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 954-987, May.

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