An Empirical Study On The Effect Of Audit Committee Characteristics On Audit Quality Of Listed Companies

Destructive events of listed companies’ financial fraud frequently appeared inthe capital market, which makes investors stare dumbfounded. Recent audit failuresin the audit market have also led to widespread uproar. After the disturbance, In orderto improve audit quality and enhance the credibility of financial statements, the publicand supervisors are increasingly concerned about the role of audit committee incorporate governance. The fundamental duties of the audit committee are as follows:to communicate with internal and external auditor, recommend and employ externalauditor, check the audit plan and estimate audit fees. These functions will link up theaudit committee with the quality of external audit. Starting from this theory, thisarticle examines the relationship between audit committee characteristics and auditquality. This article examines the independence, financial expertise, scale anddiligence of audit committee. We use audit pricing and the comprehensive evaluationof the quality of the accounting firm selected by the sample companies to representthe quality of external audit, and establish two multiple linear regression models.Firstly, we determine the indicators of the dependent variables representing thefour characteristics of the audit committee. We define the proportion of independentdirectors in the audit committee as its independence, the proportion of accountingexperts as its financial expertise, the total number of members on behalf of its size,the meeting frequency and the remunerations of independent directors on behalf of itsdiligent. We use the natural logarithm of audit fees and the comprehensive evaluationof quality index scores of the audit firm as the substitutive variables of audit qualityin this paper. We hypothesize that audit quality will be positively associated withaudit committee independence, size and diligence. As it is not clear whether theprofessional competence of audit committees will make it serving a role that iscomplementary or alternative to the role of external auditors, and after reading annualreports and other information, we find most of the companies’ audit committees have little difference in the number of financial professionals, so we assume that the auditquality will be associated with audit committee financial expertise, but do not predictthe associated direction. We examine a sample of325Shanghai A-share listedcompanies in the period of2010, after the two regression models, we find that (1)After controlling other relevant variables which impact on audit pricing, auditcommittee independence and diligence are significantly, positively associated withaudit pricing, audit committee financial expertise and size are positively associatedwith audit pricing, but not significant.(2) After controlling other relevant variableswhich impact on auditor selection, audit committee independence and diligence aresignificantly, positively associated with the comprehensive evaluation of qualityindex scores of the audit firm, audit committee financial expertise and size arepositively associated with the comprehensive evaluation of quality index scores of theaudit firm, but also not significant.(3) This study provides empirical evidence for theaudit committee of listed companies in China on the influence to the company’sexternal audit quality. We demonstrate that at present the majority of our companieswith high audit committee independence and diligence have a demand for higheraudit quality, this demand has resulted in high audit pricing, as well as hiring abetter-quality Certified Public Accountants.