Financial reporting quality and audit fees – risk committee perspective

Abstract

Purpose – The purpose of this paper is to examine the association between the existence of a risk committee in a firm and financial reporting quality. Further, we also examine whether having a risk committee moderates the effect of financial reporting quality on audit pricing. We argue that existence of a risk committee in a firm contributes to higher reporting quality and eventually affects audit pricing. Design/methodology/Approach – This study uses two different measures of risk committee existence to investigate the impact on financial reporting quality and audit pricing. Multivariate regression analysis is applied to data from Australian Stock Exchange listed companies during the years 2001 – 2013. Findings - The results indicate that the existence of a risk committee reduces discretionary accruals; this means financial reporting quality improves when risk committees are in operation. The results also indicate that risk committee existence plays a moderating role to reduce audit fees when firms have higher discretionary accruals. Practical Implications - Findings from this study will be beneficial to the regulatory authorities responsible for improving corporate governance compliance. Risk committees can serve as a risk mitigating tool in the process of decision making on investment. Finally, the results are beneficial to the development of best practice in corporate governance by promoting the existence of a risk committee. Originality/Value - This study goes beyond the traditional focus on corporate governance as this paper uses the existence of a risk committee as an indicator of better governance practice to mitigate financial and non-financial risk factors. To the best of our knowledge, this paper is among the first to investigate the consequences of firms operating with risk committees. This issue has implications for investors, auditors, directors and regulators.