Audit Committee Material Weaknesses in Smaller Reporting Companies: Still Struggling

摘要

This paper examines trends in audit committee-related material weaknesses in smaller public companies over the period 2008-2011. The audit committee is an essential component of quality corporate governance, protecting shareholders from reputational risks and decreased shareholder value that can arise from fraudulent financial reporting. Audit committees also are now finding themselves more focused on helping companies manage risks related to bribery and corruption. However, at many smaller reporting companies, the audit committee often has been a missing or ineffective link in the chain of corporate governance. We find that, for smaller reporting companies collectively, audit committee material weaknesses are not improving over time. The primary weaknesses cited in 2011 involve the lack of an audit committee or the lack of a functioning audit committee, lack of independent (or outside) board members or audit committee members, and lack of board members with financial expertise. We offer implications based on the results.