Audit Committee Composition and Shareholder Actions: Evidence from Voting on Auditor Ratification

2003 ◽  
Vol 22 (2) ◽  
pp. 253-263 ◽  
Author(s):  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Audit Committee ◽  
Empirical Support ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Audit Committees ◽  
Independent Directors ◽  
Client Relationships ◽  
Audit Performance

Recent actions related to audit committees by the Securities and Exchange Commission (SEC) reflect the Commission's belief that the composition of audit committees can influence the monitoring of auditor-client relationships, and thereby influence shareholder perceptions about auditor independence and overall audit performance. The SEC has also suggested that shareholder perceptions about the auditor will influence shareholder actions, including voting on ratifying the auditor selected by management. This paper examines the association between audit committee composition and shareholder actions, using auditor ratification data from 199 companies. The results indicate that, in companies with high nonaudit fee ratios, shareholders are less likely to vote against auditor ratification if the audit committee has solely independent directors. These results provide empirical support to the assertions of the SEC and others that audit committee composition can impact investors' perceptions and actions. However, the low percent of votes against auditor ratification indicates that the results must be interpreted with caution.

Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor?

2012 ◽  
Vol 88 (1) ◽  
pp. 297-326 ◽  
Author(s):  
Vic Naiker ◽  
Divesh S. Sharma ◽  
Vineeta D. Sharma
Keyword(s):  
Audit Committee ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Future Research ◽  
Corporate Boards ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Nonaudit Services

ABSTRACT: To address potential threats to auditor independence, the Sarbanes-Oxley Act of 2002 (SOX) requires the audit committee to pre-approve nonaudit services (NAS) procured from the auditor. However, the presence of a former audit firm partner (FAP) affiliated with the current auditor on the audit committee could undermine the audit committee's due diligence over the NAS pre-approval process. To alleviate such concerns, the Securities and Exchange Commission approved a three-year “cooling-off” period for appointing audit firm alumni as independent directors. Our analyses show that the presence of both affiliated and unaffiliated FAPs on audit committees does not lead to greater NAS procured from the auditor; rather, FAPs reduce NAS procured from the auditor. Moreover, NAS decline significantly following the appointment of FAPs to the audit committee. Further tests suggest the three-year cooling-off period may not be warranted and deserves further investigation. Our study raises important implications for regulators, policy makers, corporate boards, and future research. Data Availability: Data are publicly available from sources identified in the text.

Auditor Independence in the United States: Cornerstone of the Profession or Thorn in Our Side?

2018 ◽  
Vol 32 (3) ◽  
pp. 145-168 ◽  
Author(s):  
Bryan K. Church ◽  
J. Gregory Jenkins ◽  
Jonathan D. Stanley
Keyword(s):  
United States ◽  
Financial Reporting ◽  
The United States ◽  
Auditor Independence ◽  
Audit Committees ◽  
Systematic Evaluation ◽  
Client Relationships ◽  
Reporting Process ◽  
Regulatory Approach

SYNOPSIS The objective of this paper is to provide a systematic evaluation of independence as a foundational element of the auditing profession. We maintain that while independence is a theoretically appealing construct, it is fraught with practical problems surrounding its implementation, monitoring, and regulation. We analyze the current oversight of auditor independence and evaluate the need for auditor independence from the perspective of information users and information producers. In the process, we discuss important implications and intractable challenges that affect one or more parties involved in the financial-reporting process. Finally, we carefully evaluate alternatives to the current regulatory approach for managing auditor independence (i.e., proscribing various auditor-client relationships). We conclude that increasing audit committees' responsibilities for monitoring the auditor's independence—along with additional disclosure about threats and safeguards to auditor independence—is worthy of further consideration and debate as a path toward addressing the auditor independence conundrum.

Do Investors' Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting

2005 ◽  
Vol 24 (2) ◽  
pp. 9-25 ◽  
Author(s):  
Suchismita Mishra ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Empirical Support ◽  
Positive Association ◽  
Auditor Independence ◽  
The Other ◽  
Audit Committees ◽  
Single Measure ◽  
Nonaudit Services ◽  
Recent Initiative

In FRR No. 68, the SEC (2003b) updated the rules related to the disclosure of fees paid to the independent auditor by requiring more detailed information about nonaudit fees. The SEC (2002, 2003b) asserted that the partition of nonaudit fees into the categories of audit-related, tax, and other fees would be useful for investors in assessing the auditor's independence and in voting on ratifying the auditor. The SEC suggested that investors would view audit-related and tax services more favorably than “other” nonaudit services. In this paper we test the SEC's assertions by examining shareholder ratification votes, during 2003, at 248 of the S&P 1500 firms. Our results support the SEC's assertion that investors would view audit-related fees differently than the other two types of nonaudit fees. However, contrary to the SEC's assertion, both the tax fee ratio and the other fee ratio have a positive association with the proportion of votes against auditor ratification. The results related to tax fees provide empirical support to the PCAOB's recent initiative to examine the association between tax services and auditor independence. Our results can be useful for client managements and audit committees considering purchases of nonaudit services from auditors. Our findings also suggest that it may be useful to replicate some prior studies (that use a single measure of nonaudit fees) using the newer, more finely partitioned, fee data.

Does Audit Committee Disclosure of Partner-Selection Involvement Signal Greater Audit Quality?

2021 ◽  
Author(s):  
Jimmy F. Downes ◽  
Michelle A. Draeger ◽  
Abbie E. Sadler
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Selection Process ◽  
Partner Selection ◽  
Analyst Forecasts ◽  
Securities And Exchange Commission ◽  
Audit Committees ◽  
Voluntary Disclosures ◽  
Level Of Involvement ◽  
Selection Of

We investigate whether audit committees use voluntary disclosures to signal the committees’ higher level of involvement in the audit partner-selection process, which contributes to higher levels of audit quality. Audit committees more involved in the partner-selection process should ensure the selection of a more rigorous partner. We test this conjecture by first identifying partners new to audit engagements. We then compare audit quality for companies whose audit committees disclose involvement in the selection of the new partner to those without this disclosure. We find that this disclosure is positively associated with audit quality (measured using discretionary accruals, misstatements, and meeting consensus analyst forecasts by a very small margin). Our results are more salient for complex companies and those with powerful audit committees. These findings highlight that audit committees use their disclosures to signal involvement in the partner-selection process and are relevant to the Securities and Exchange Commission.

scholarly journals The Impact of Audit Committees on US Nonprofit Organizations’ Governance

2020 ◽  
Vol 27 (1) ◽  
pp. 30
Author(s):  
Husam Abu-Khadra
Keyword(s):  
Nonprofit Organizations ◽  
Audit Committee ◽  
Nonprofit Sector ◽  
The United States ◽  
Preliminary Evidence ◽  
Securities And Exchange Commission ◽  
Audit Committees ◽  
Public Companies ◽  
Policy Makers ◽  
The Impact

All public companies in the United States are required by the securities and exchange commission (SEC) to have an audit committee. Such enforcement can be attributed to high-profile corporate failures and their connections to nonexistence, ineffective or weak audit committees and governance. Despite the efforts to establish a similar argument and enforcement structure for the nonprofit sector, the internal revenue service (IRS) has not pursued legislation, and no empirical evidence has been established to support any public policy changes. This paper contributes to the literature in this field by being the first study to examine 124,980 nonprofit organizations during the period of 2010 to 2015 to test the association between governance in nonprofit organizations and audit committees. We included fifteen measures from these organizations’ IRS Form 990 filings to formulate the study variables. We found significant evidence that the existence of audit committees improves the governance scores of nonprofit organizations. Our study findings have significant implications for nonprofit executives, policy makers and any other interested parties; these findings act as preliminary evidence to support more proactive policies regarding mandatory audit committees for nonprofit organizations. 

Auditor Independence: A Focus on the SEC Independence Rules

2008 ◽  
Vol 23 (2) ◽  
pp. 247-260 ◽  
Author(s):  
Audrey A. Gramling ◽  
Vassilios Karapanos
Keyword(s):  
Audit Committee ◽  
Financial Statements ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Background Information ◽  
Instructional Resources ◽  
Sarbanes Oxley ◽  
Policy Goals ◽  
Public Company ◽  
Securities Laws

Auditor independence is an important underpinning of the federal securities laws. These laws require that registrants' financial statements filed with the Securities and Exchange Commission (SEC) be audited by independent public accountants. The focus on independence for public company auditors was increased in light of the requirements of the Sarbanes-Oxley Act of 2002 to strengthen auditor independence. These instructional resources provide background information on the current SEC auditor independence rules. After becoming familiar with these rules, you will have the opportunity to complete several case scenarios that address: (1) hypothetical settings that may represent violations of the SEC independence rules, (2) possible actions that an audit committee might take when it determines that the SEC independence rules may have been violated, and (3) possible alternatives to the current SEC independence rules that could achieve the desired public policy goals of objective audits and investor confidence.

Who's Really in Charge? Audit Committee versus CFO Power and Audit Fees

2014 ◽  
Vol 89 (6) ◽  
pp. 2057-2085 ◽  
Author(s):  
Matthew J. Beck ◽  
Elaine G. Mauldin
Keyword(s):  
Audit Committee ◽  
Economic Recession ◽  
Audit Fees ◽  
Auditor Independence ◽  
Negotiation Process ◽  
Data Availability ◽  
Audit Committees ◽  
Exogenous Shock ◽  
Cast Doubt ◽  
Recent Financial Crisis

ABSTRACT Although regulation makes audit committees responsible for determining and negotiating audit fees, researchers and practitioners express concerns that CFOs continue to control these negotiations. Thus, regulation may give investors a false sense of security regarding auditor independence. We utilize the recent financial crisis and economic recession as an exogenous shock that allows us to shed light on the relative influence of the audit committee and the CFO on fee negotiations. During the recession, we find larger fee reductions in the presence of more powerful CFOs, and smaller fee reductions in the presence of more powerful audit committees. We also find the CFO or the audit committee primarily influences fees when their counterpart is less powerful. Our findings suggest a more complex relationship between the CFO and the audit committee than current regulations recognize and cast doubt on the ability of regulation to force one structure on the negotiation process. Data Availability: Data are available from public sources identified in the text.

The Association between Audit Committee Characteristics and Audit Fees

2003 ◽  
Vol 22 (2) ◽  
pp. 17-32 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker ◽  
Gary F. Peters ◽  
K. Raghunandan
Keyword(s):  
Audit Committee ◽  
Audit Fees ◽  
Audit Committees ◽  
Independent Directors ◽  
Span Of Control ◽  
Big 5 ◽  
Financial Expertise ◽  
Disclosure Rules ◽  
Using Data

This study examines the association between audit committee characteristics and audit fees, using data gathered under the recent SEC fee disclosure rules. We hypothesize that audit fees will be positively associated with audit committee independence, financial expertise, and meeting frequency. We examine a sample of 492 nonregulated, Big 5-audited firms that filed proxy statements with the SEC in the period from February 5, 2001 to June 30, 2001. We find that audit committee independence (defined as an audit committee comprised entirely of outside, independent directors) and financial expertise (defined as an audit committee containing at least one member with financial expertise) are significantly, positively associated with audit fees. This is in contrast to the findings of Carcello et al. (2002a), who find that audit committee characteristics are not significant in the presence of board-related variables. Meeting frequency (defined as an audit committee that meets at least four times annually) was not associated with higher audit fees at conventional levels. This evidence is consistent with audit committees taking actions within their span of control to ensure a higher level of audit coverage.

The Composition of Nonprofit Audit Committees

2006 ◽  
Vol 20 (1) ◽  
pp. 75-90 ◽  
Author(s):  
Thomas E. Vermeer ◽  
K. Raghunandan ◽  
Dana A. Forgione
Keyword(s):  
Nonprofit Organizations ◽  
Audit Committee ◽  
Nonprofit Sector ◽  
Internal Audit ◽  
Audit Committees ◽  
Chief Financial Officers ◽  
Independent Directors ◽  
Government Grants ◽  
Sarbanes Oxley ◽  
Financial Expert

Audit committee composition has attracted significant attention from legislators and regulators in recent years. Although most of the focus has been on corporate audit committees, recent legislative efforts underscore the importance of governance in the nonprofit sector. Using data from a survey of 118 chief financial officers of nonprofit organizations as well as financial data from the GuideStar database, we examine the composition of nonprofit audit committees and factors associated with their composition. The data show that many nonprofits have not adopted Sarbanes-Oxley reforms, since we find that 36 percent of nonprofits have audit committees that are not completely independent. Organizations that are larger, receive government grants, and use a Big 4 auditor are more likely to have audit committees with solely independent directors. Surprisingly, universities and hospitals are less likely to have solely independent directors on the audit committee. Eighty-eight percent of nonprofits have at least one financial expert on the audit committee, and organizations that receive government grants and have an internal audit function are more likely to have a financial expert on the committee. Overall, our findings support the view that nonprofit audit committee composition varies in response to the demands related to the need for resources, the presence of other monitoring mechanisms, and the type of nonprofit.

SEC chief accountant shines spotlight on audit committees

2018 ◽  
Vol 19 (4) ◽  
pp. 4-5
Author(s):  
Stephen G. Stroup
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Securities And Exchange Commission ◽  
Audit Committees ◽  
Corporate Boards ◽  
Securities Litigation ◽  
Content Type ◽  
The Public ◽  
Market Risks ◽  
Baruch College

Purpose To explain and analyze remarks concerning the importance and responsibility of corporate audit committees made by US Securities and Exchange Commission (SEC) Chief Accountant Wesley Bricker before the Baruch College Financial Reporting Conference on May 3, 2018. Design/methodology/approach Discusses Mr Bricker’s remarks in three principal areas: the role of audit committees in clearly understanding non-GAAP measures presented to the public, the attentiveness of audit committees to disclosures regarding changes in market risks, and the importance of independent, diverse thinking on corporate boards, and particularly, audit committee, brought by independent directors as an element of strong corporate governance. Findings The coming months may offer a better indication whether Mr Bricker’s speech is simply a specific point of emphasis from the Office of the Chief Accountant or is perhaps intended to foreshadow a contemplated or ongoing enforcement initiative. Originality/value Expert guidance from experienced lawyer with specialties in SEC investigative and enforcement actions, securities litigation, accountants’ defense, white collar criminal defense and corporate investigations

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