Audit committee, external audit and accounting conservatism: Does company’s growth matter?

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Abstract

The objective of this analysis is to examine the joint effect of the audit committee and external audit on conservatism accounting and how a company’s rate of growth influences these relationships. The sample used in this study comprises all non-financial listed Portuguese firms from 2005 to 2017. A fixed-effects regression is performed to examine the association between the audit committee and external audit and conservatism accounting and how the company’s rate of growth influences these relationships. Using an accruals-based proxy to compute accounting conservatism, this study indicates that companies audited by Big 4 audit firms report more conservative accounting than firms audited by non-Big 4 audit firms and that audit committee and external auditors together appear to increase accounting conservatism. Additionally, the findings suggest that the degree of conservatism reduction related to more growth is diminished when the companies are examined by a Big 4 auditor and the board of directors have an audit committee. The findings based on this study offer valuable data to investors and regulators in assessing the effect of the audit committee and external audit on the quality of earnings.

Keywords: Audit Committee, External Audit, Conservatism Accounting, Growth Opportunities

Authors’ individual contribution: Conceptualization — S.A. and C.C.; Methodology — S.A. and C.C.; Investigation — S.A. and C.C.; Writing — Original Draft — S.A. and C.C.; Writing — Review & Editing — S.A. and C.C.; Funding Acquisition — S.A. and C.C.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: This work was financially supported by the Research Unit on Governance, Competitiveness and Public Policy (UIDB/04058/2020) + (UIDP/04058/2020), funded by national funds through FCT — Fundação para a Ciência e a Tecnologia (The Foundation for Science and Technology).

JEL Classification: M41, M42, G34

Received: 01.02.2022
Accepted: 24.06.2022
Published online: 28.06.2022

How to cite this paper: Alves, S., & Carmo, C. (2022). Audit committee, external audit and accounting conservatism: Does company’s growth matter? Journal of Governance & Regulation, 11(3), 17–27. https://doi.org/10.22495/jgrv11i3art2