The Impact of Audit Oversight Quality on the Financial Performance of U.S. Firms: A Subjective Assessment

Rebecca Abraham (), Hani El Chaarani and Zhi Tao
Additional contact information
Rebecca Abraham: Huizenga College of Business, Nova Southeastern University, 3301 College Avenue, Fort Lauderdale, FL 33314, USA
Hani El Chaarani: Faculty of Business Administration, Tripoli Campus, Corniche El-Mina, Tripoli 11-5020, Lebanon
Zhi Tao: College of Business and Public Policy, University of Alaska at Anchorage, 3211 Providence Drive, Anchorage, AK 99508, USA

JRFM, 2024, vol. 17, issue 4, 1-19

Abstract: Audit committees are appointed by the board of directors of corporations to oversee the financial reporting process, monitor financial control processes, hire and assess independent auditors, and communicate findings with management and auditors. We propose two new measures of audit oversight quality. The first measure is purely subjective, in that it scores audit committees on a scale based on their ability to fulfill one or more of their responsibilities, as mentioned in annual reports, Form 10-K and DEF 13A. The second measure concerns audit committee activity, as it measures the number of times the term ‘audit committee’ is mentioned in these documents. Both measures were obtained for U.S. pharmaceutical companies and energy companies from 2010 to 2022. The audit oversight quality measures were regressed in regard to profitability (measured by return on assets and return on equity), debt capacity (measured by equity multiplier), and firm value (measured by Tobin’s q and economic value added). Audit oversight quality, using both measures, reduces the return on equity. Audit oversight quality, using both measures, had a disciplining effect on debt. Increases in the oversight of increasing debt discourage the propensity to increase borrowing using collateral (debt capacity), and reduce investor returns through investment in debt-financed projects (return on equity). Audit oversight quality, using both measures, exhibited a size effect on the firm’s value, in that an increase in the firm size with high audit oversight quality increases the firm’s value. However, it is possible that only the first measure of audit oversight quality significantly increased the firm’s value, as only the first measure exhibited robustness to the endogeneity effect of size.

Keywords: audit quality; audit quality and earnings; audit quality and debt; audit quality and firm size; audit measure; audit oversight (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/1911-8074/17/4/151/pdf (application/pdf)
https://www.mdpi.com/1911-8074/17/4/151/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:17:y:2024:i:4:p:151-:d:1372870

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().