The Establishment and Quality of Audit Committees and Earnings Conservatism

Using firms listed in the Taiwan Stock Exchange (TSE) and Taipei Exchange (TPEx) from 2007 to 2014 as a sample, this study examines the effects of the establishment and quality of audit committees on earnings conservatism. The audit committee quality is measured by multiple indicators including the size of the audit committee, whether the convener or members have expertise in financial or corporate governance, and the activities of the audit committee (i.e., the frequency of meetings and members' attendance). The empirical results indicate that the firms with audit committees have significantly conservative earnings than those without audit committees. Further analysis shows that the firms with larger audit committee size tend to report more conservative earnings, and the firms with more members with financial specialization and more frequent audit committee members' attendance tend to report less conservative earnings.