Paper Example on the Financial Expertise of Audit Committees

Introduction

This study examines whether financial expertise of audit committees affect the quality of textual information conveyed through the management discussion and analysis section of the corporate annual report, which is thus achieved through examining and explaining the effect of committees' financial expertise on constraining managers for manipulating the Management discussion and analysis tone upwards compared to firm fundamentals. The contributing aspects that lead to the establishment of the case for the significance of the purpose of the study were based on the debate over the usefulness of qualitative information. We find that studies argue that qualitative information enhances financial information and provide incremental information content to investors, which is a good thing.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

On the other hand, some studies claim that qualitative disclosures cannot enlighten due to their language complexity, and also, we find that corporate managers manipulate qualitative information to serve their interests. For Example, managers may attempt to induce favorable market reactions by manipulating the tone of language used in qualitative disclosures. Also, no prior or study has examined the audit committee's role in improving the quality of qualitative disclosures. Our results provide timely evidence for recent concerns regarding the management discussion and analysis reporting quality. With all this opinion compiled, they form a considerable debate over the usefulness of qualitative information and probing the factors that create differences in qualitative information poses a need for extensive research.

Context

The study took place at the corporate finance firm where the study considers looking into the effect of audit committees' financial expertise on constraining managers from manipulating the MD&A tone upwards compared to firm fundamentals. In discovery, prior research finds that financial experts' ability to monitor corporate managers enhances the oversight role of audit committees.

Also, financial experts are often asked to meet higher standards than no experts, which raise concerns on reputation and litigation risk, but on the other side, this also suggests that audit committee members with financial expertise have incentives to constrain upward tone management to secure their reputation and reduce the risk of litigation. Therefore, we hypothesize that audit committee financial expertise mitigates the upward management of tone in the Management Discussion & Analysis section and predicts a negative relation between audit committee financial expertise and uncharacteristic MD&A tone.

Participants

Two firms were researched by IBM's audit committee charter, which states in support that the audit committee. The audit committee should review the financial section of the IBM annual report on Form 10-K, including the MD&A, before its release to shareholders. Similarly, Credit Suisse, another firm, specifies in support that its audit committee should 'assess the clarity and consistency of disclosures and explanations in the financial statements and MD&A.'

These examples suggest that the audit committee may enhance the review process, which, in turn, affects the quality of the MD&A section of financial reports. As a result, a precise method of analyzing which companies to base research on was projected where they are selected based on their samples and data, whereby if a company makes any amendment to its 10-K (Form 10-K/A), we only consider the originally filed form. On the other hand, we restrict the sample to those with sufficient data to run a normal tone estimation model and drop observations from industry-years that have less than 20 observations. Data is collected on audit committee members' financial expertise from the BoardEx Individual Profile database, which provides biographical information about corporate board members such as their employment records, board affiliations, and other professional certificates and achievements.

Reference

Lee, J., & Park, J., (2019). The Impact of Audit Committee Financial Expertise on Management Discussion and Analysis (MD&A) Tone. European Accounting Review, 28(1), 129-150.