The Relationship between Audit Committee Characteristics, Financial
Statement Restatements, and Audit Fees: US evidence

Abstract

This thesis aims to provide oversights about the impact of audit committee characteristics
on constraining the occurrence of financial statement restatements. It also examines the
impact of audit committee characteristics on audit fees following the incident of
restatements. In addition, to increase the generalisability of the results of this study, it
examines the impact of audit committee characteristics on mitigating the occurrence of
restatements in family businesses. The study examines abovementioned issues, using 450
restatement announcements and matching them with a peer group of 450 control firms that
are similar in size and industry. It covers the period of 2011-2016 using the U.S. context.
The results reveal that larger audit committees, and audit committee tenure, are associated
negatively with the incidence of restatements. Thus, regulators and policy makers should
motivate companies to assign a large number of audit committee directors to increase their
effectiveness. Work tenure also assists audit committee directors to be familiar with the
firms and their operation and accounting systems. It therefore enables them to detect any
accounting irregularities before issuing the financial statements. Regulators and policy
makers also should established a code that force companies to keep their audit committee
directors for a period of time and avoid changing them unless they show ineffective role.
Moreover, busy directors are ineffective at constraining the likelihood of restatements, as
they do not devote enough time and effort to monitoring the financial reporting process.
Regulators and policy makers, therefore, should prohibit audit committee directors from
serving in many boards at the same time. The study reports a significant result about the
impact of audit committee characteristics on audit fees following the incident of
restatements. Busy Audit committee directors demand extensive audit work to protect their
reputational capital following restatements because they do not put enough time to
oversight the external audit quality. This finding proves to regulators and policy makers
that busy directors have also a negative impact not only on financial reporting process but
also on external audit quality. Audit committee directors with greater stock ownership also
exhibit a positive association with external audit quality. Thus, it is recommended to
compensate audit committee directors with stock ownership to align the interests of
directors and shareholders. In terms of the impact of audit committee characteristics on
mitigating the occurrence of restatements in family businesses, the findings support the
result and find that audit committee tenure, as well as audit committee stock ownership in
family business, also has a positive impact and can mitigate the incidence of restatements.
Thus, long work tenure and stock ownership should be adopted also in family business.