The relationship between audit committees and financial reporting quality : a pilot study

This paper provides the results of a pilot study of Australian listed companies that examines the relationship between audit committees and the quality of the companies’ financial reporting. The following audit committee characteristics are examined in the paper: the independence and financial expertise of audit committee members and the level of audit committee activity. Financial reporting quality is proxied by two alternative measures of earnings quality. These measures are based on a modified version of the discretionary accruals model in Jones (1991) and the accrual estimation error model in Dechow and Dichev (2002). Using a pilot sample of 50 companies, the results of the study suggest that there is not any significant relationship between audit committee characteristics and financial reporting quality. But there is some evidence to suggest that the establishment of an audit committee improves the quality of financial reports.