The Effect of Audit Committee Attributes on Financial Statement Restatements in the Pharmaceutical Industry

• Published in: Journal of applied financial research Vol. 1; pp. 49 - 59
• Main Authors: Gaetani, Melisa, Fenner, Charles
• Format: Journal Article
• Language: English
• Published: Gulfport Academy of Business Research 01.01.2020
• Subjects: Accountability; Audit committees; Boards of directors; Corporate governance; Corporate growth; Financial literacy; Financial reporting; Financial restatements; Financial statements; Meetings; Pharmaceutical industry; Public companies; Quality; Scandals; United States > US
• ISSN: 2381-3105

Financial statement restatements signal to stakeholders that the previously reported financial information can no longer be relied upon; therefore, it must be restated in order to be reliably utilized for decision-making. In response to the catastrophic financial reporting scandals in the early 2000s, the Sarbanes-Oxley Act of 2002 (SOX) was enacted in an attempt to protect the public by prescribing precautionary and accountability measures for those charged with financial reporting governance. The audit committee, a subcommittee of the board of directors, was one of the main financial reporting stewards targeted by SOX. The problem addressed by the research is that a lack of quality on the audit committee can result in restatements for U.S. publicly-traded pharmaceutical companies. Using agency theory and positive accounting theory as guiding frameworks, the purpose of the study was to investigate the relationship between audit committee quality and the presence and/or severity of restatements. The study developed a definition of audit committee quality by using the minimum audit committee requirements set out in SOX as a foundation. Subsequently, existing academic literature was turned to in order to develop and refine a scoring system to quantify the audit committee quality variable. The study was conducted quantitatively using a correlational analysis between the independent variable, audit committee quality, and the dependent variable, restatement severity. The population examined was pharmaceutical companies listed on the NYSE or NASDAQ during the period of 2015-2016. Out of a total population of 2,104 filings, data from a sample of 134 filings was hand-collected from publicly available databases. A correlational analysis found a moderate negative correlation between audit committee quality and restatement severity (r=-0.4733). The results of the study are important to academics and practitioners alike given the establishment of a theoretical model upon which future studies can be developed as well as metrics to select and evaluate audit committees.