Audit Committee Effectiveness & Earnings Quality: Review of Literature & Future Research Direction

Abstract

This research study identifies and documents effect of Sarbanes-Oxley Act (SOX) on audit committee effectiveness in an organizational context, and how the theories can be applied to real businesses all in a Post SOX environment. Within 15 years after the SOX passed, there has been changes in the dynamics of organizational behavior as a consequence of the act. As documented in previous researches, the corporate governance effects and broader organizational changes can have very interesting unintentional effect. The accounting financial expertise requirement supported by SOX is alleged to induce risky companies make audit committee weaker rather than stronger. Researchers contradict each other. I discuss here the effects of an increase in audit committee financial expertise, the interactions among audit committee status, audit expertise, and firm characteristics. Recommendations are given in two streams. One stream of recommendation is for firms to choose a right structure of audit committee. Another set of recommendation contributes specific variables taken from other recent stream of financial accounting research that the future corporate governance researches may consider to bring audit literature to date. This research calls for the need to see the audit committee structure in newly listed firms (new/successive cohorts) versus listed firms in earlier decades (old cohorts)