The Influence of the Audit Committee's Composition and Expertise on Earnings Quality in the European Union

ERASMUS UNIVERSITEIT ROTTERDAM Erasmus School of Economics FEM11112 Master Thesis Accounting and Auditing 2012-2013 Master Thesis THE INFLUENCE OF THE AUDIT COMMITTEE’S COMPOSITION AND EXPERTISE ON EARNINGS QUALITY IN THE EUROPEAN UNION By: Jun-Patrick J. Croes Student number: 325490 Supervisor: Dr. C.D. Knoops Second reader: Dr. L. Dai Date: 15 Augustus 2013   ABSTRACT My master’s thesis focuses on the transformation of the audit committee structure regarding the audit committee directors’ composition and expertise requirements that is being proposed in the audit reform by the European Commission (2011). I use data on 205 European public interest entities spread across 17 European Union member states to study the relationship among audit committee characteristics with earnings quality, proxied by benchmarking approaches. I find that certain audit committee characteristics changed considerably between 2008 and 2011. EU public interest entities’ audit committees became larger in size, more active and employed more financial experts. The results from logistics regressions suggests that audit committees who are currently meeting the European Commission’s (2011) proposed audit reform requirements, the frequency in which the audit committee meets, and larger audit committees increases the likelihood of higher earnings quality. The evidence provided by my master’s thesis supports the European Commission’s actions of reforming the audit committee to improve financial reporting quality. The results could be of further use to policy makers, regulators, management and stakeholders who are concerned whether the transformation of the audit committee structure, in the form of a fully (100%) independent audit committee consisting out of at least two directors with experience and knowledge in auditing or one director with experience and knowledge in auditing and another one in accounting, improves the supervision capability of the audit committee.