Alrudayni, Ashwag Hassan S (2023) The Personal Characteristics of Audit Committee Financial Experts, Audit Quality and Financial Reporting Quality. PhD thesis, Victoria University.

Abstract

The financial expertise of audit committee members has received a lot of attention in academic research due to the significant role the committee plays in the quality of financial reporting. However, the findings of these studies have either been ambiguous or very complex. This research examines the influences of audit committee financial experts’ personal characteristics (gender, industry expertise, multiple directorships, tenure, and ownership of shares) on financial reporting and audit quality. The cross-sectional version of the modified Jones model, in which discretionary accruals served as the earnings management proxy, was employed to measure the quality of financial reporting. Audit quality was measured using the natural logarithm of audit fees paid to incumbent auditors. Ten hypotheses were developed within an agency and resource dependence theories framework. These were tested using data collected from a sample of 860 firm-year observations of ASX publicly-listed firms for the period 2016 to 2020. Using ordinary least squares (OLS) regression, the results indicate that financial experts with ownership are more effective in reducing earnings management, while there is no relationship between financial experts’ gender, industry experience, tenure, or multiple directorships with earnings management. This suggests that ASX-listed firms with a higher average number of audit committee financial experts with shares ownership have a favourable effect on financial reporting quality in Australia. The results also show that financial experts with multiple directorships and industry knowledge increase audit fees while there is no relationship between financial experts’ gender and the ownership of stocks or shares and audit fees. These findings indicate that financial experts with industry experience and multiple outside seats have a deeper understanding of the specific financial and regulatory requirements of their industry and have gained valuable experience (including governance experience) from other boards. This gives them the skills and motivation to demand higher audit quality assurances from their auditors. In turn, this leads to a higher level of oversight and a greater need for audit services, resulting in higher audit fees. However, the average tenure of audit committee financial experts is negatively correlated with audit fees. This finding indicates that long-serving financial experts have greater knowledge and experience about the company’s financial operations, resulting in a more efficient and effective audit and lower fees for the auditor. A number of robustness and sensitivity tests were conducted to verify that the main results of the study were robust across different measurements and estimators. The findings of this study have clear implications for corporate management, firms, regulators, and scholars. This study generates important insights for two key corporate governance mechanisms: audit committee financial experts and external auditors. It also contributes to new knowledge on corporate governance, financial reporting quality, auditing, and accounting.

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