Audit Committee, External Auditor, and Financial Reporting Quality in Indian Corporate Sector

This study empirically examines the association between corporate governance andfinancial reporting quality in Indian corporate sector. In this regard, corporategovernance has been measured by characteristics of two mechanisms, namely auditcommittee and external auditors as external mechanism. Furthermore, accruals qualityas attribute of earnings quality has been used as the proxy for financial reportingquality. This study uses 1250 firm-year observations from a sample of 250 firms drawnfrom top 500 Indian companies listed on National Stock Exchange (NSE) over a fiveyear period from 2008 to 2012. In order to test developed hypotheses, panel dataregression with has been employed to determine the influence of corporate governancecharacteristics on financial reporting quality measured by earnings quality attributes.With regard to audit committee characteristics, this study provides some evidence thatalthough audit committee size, and audit committee independence are found to besignificantly related to financial reporting quality, audit committee meetings and auditcommittee accounting expertise have no significant relationship with financial reportingquality. Regarding external auditor, the findings demonstrate that contradictory to theexpectation, audit fee is not significantly associated with financial reporting quality. Theresults for last hypothesis show that non-audit fee ratio has a negative and significantrelationship with financial reporting quality. The results are also robust to additional testusing year and industry as dummy variables.