J.J. Wild’s research while affiliated with University of Wisconsin–Madison and other places

Managerial accountability to shareholders is fundamental to the integrity of capital markets. Accordingly, corporate governance mechanisms have been established to minimize the risk of fraudulent financial reporting. An audit committee of the board of directors, whose responsibilities extend to the oversight of the financial reporting process, is arguably one of the more important governance mechanisms. The purpose of this paper is to examine the quality of managerial accountability to shareholders before and after the formation of an audit committee. The analysis relies on an analytical illustration to formulate empirical tests of the informativeness of accounting earnings conditional on audit committee formation. The evidence indicates that earnings are significantly more informative to market participants after formation of the audit committee. This finding is consistent with the notion that the audit committee both enhances managerial accountability to shareholders and is an effective component of corporate governance.