The association of audit committee oversight with corporate disclosure quality

The Securities and Exchange Commission (SEC) and the Sarbanes-Oxley Act of 2002 suggest that the quality of corporate disclosure is higher when audit committees effectively oversee the financial reporting process. I investigate whether audit committees that meet the requirements of the Sarbanes-Oxley Act with respect to members' independence and financial expertise would be associated with higher disclosure quality through lower forecast dispersion, forecast errors, revision volatility, and analysts' underreaction to prior earnings information. I find lower forecast dispersion when all members of the audit committee are independent. In addition, revision volatility and analysts' underreaction are lower when the audit committee is comprised of independent directors, where at least one member is a financial expert. Further, the results reveal that independence is the most critical of those attributes tested, to the effectiveness of audit committees. Overall, the association I document between audit committees and disclosure quality suggests that efforts of the Sarbanes-Oxley Act to strengthen the effectiveness of corporate audit committees may be effective in enhancing the quality of corporate disclosure.