The relation between audit committee effectiveness and financial reporting quality in listed companies

Abstract

Corporate governance failures and poor financial reporting quality often follow when an audit committee is ineffective. This study investigated the relation between audit committee effectiveness (independent variables) and the absence of restatements as a proxy for financial reporting quality (dependent variable). Variables were analysed from public reports of 40 South African listed companies. In Phase 1, descriptive statistics revealed that 23 out of 51 audit committee effectiveness variables had sufficient variability. In Phase 2, categorical principal component analysis subsumed the 23 variables into six factor variables and their hypotheses. In Phase 3, binomial logistic regression testing identified one factor variable significantly reduced restatements. The subsumed variables are (1) the audit committee consists of four or more members, (2) the audit committee engages external auditors to provide assurance on summarised financial information, (3) the audit committee reviews the content of summarised information and (4) three or more audit committee meetings are held annually.