Independent, financially-literate audit committees lead to higher firm values and less diversion of resources by management, shows a new study by researchers at the University of Toronto.
But the paper, which looked at small companies that voluntarily adopted standards required of larger companies, also says it's important for regulators to stay flexible around rules requiring high-quality audit committees, particularly for smaller firms that may be hurt by expensive director compensation costs.
The study was motivated by controversy surrounding a 2003 decision by the Ontario Securities Commission (OSC). The OSC exempted smaller firms from a new policy requiring higher audit committee standards for TSX-listed securities issuers, arguing for a balance between investor protection and maintaining a competitive environment for Canadian companies.
"Our evidence is consistent with OSC's stand," said Feng Chen, a professor at the University of Toronto Mississauga and the University's Rotman School of Management who wrote the paper with Yue Li, also an accounting professor at UTM and the Rotman School. The researchers wrote that critics of voluntary standards may "underestimate the economic incentives for smaller firms to voluntarily adopt the new policy."
The researchers examined data for companies listed on the Toronto Venture Exchange, which were exempt from the policy, as well as for a group of TSX-listed companies, which were not. Out of 376 TSX Venture firms, some 101 of them had voluntarily adopted the OSC policy by 2005, something the researchers called "a pleasant surprise." The policy requires audit committees to have at least three independent and financially-literate members.
The study found that TSX Venture companies with lower compliance costs and a greater need to raise external financing were more likely to adopt the higher standards. All companies operating under the higher standards, including those that were required to, generally saw higher firm value, improved investment efficiency, and significantly lower borrowing costs.
Previous research has found that companies that have financial experts on their audit committees are less likely to restate earnings, dismiss their auditors if they receive a negative report, and are less likely to outsource routine internal auditing jobs to external auditors.
The OSC policy was developed following tougher accounting and financial rules drafted in the U.S. under the Sarbanes-Oxley Act. Critics of the OSC's decision to exempt smaller companies called it unfair and said that it was small start-ups where investors faced the biggest risks.
But the researchers' study shows that the OSC policy "is effective," says Prof. Li. "It provides the flexibility for smaller firms to assess for themselves the costs versus the benefits of stronger governance. A more strict policy on mandatory adoption probably would not work well in the Canadian context where we have a large number of firms on the venture stock exchange."
The study is forthcoming in the Accounting Review.
For the latest thinking on business, management and economics from the Rotman School of Management, visit www.rotman.utoronto.ca/FacultyAndResearch/NewThinking.aspx.
The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world’s most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions. The School is currently raising $200 million to ensure Canada has the world-class business school it deserves. For more Information, visit www.rotman.utoronto.ca.
For more information:Ken McGuffin
Ken McGuffin | EurekAlert!
Innovative genetic tests for children with developmental disorders and epilepsy
11.07.2018 | Christian-Albrechts-Universität zu Kiel
Oxygen loss in the coastal Baltic Sea is “unprecedentedly severe”
05.07.2018 | European Geosciences Union
A new manufacturing technique uses a process similar to newspaper printing to form smoother and more flexible metals for making ultrafast electronic devices.
The low-cost process, developed by Purdue University researchers, combines tools already used in industry for manufacturing metals on a large scale, but uses...
For the first time ever, scientists have determined the cosmic origin of highest-energy neutrinos. A research group led by IceCube scientist Elisa Resconi, spokesperson of the Collaborative Research Center SFB1258 at the Technical University of Munich (TUM), provides an important piece of evidence that the particles detected by the IceCube neutrino telescope at the South Pole originate from a galaxy four billion light-years away from Earth.
To rule out other origins with certainty, the team led by neutrino physicist Elisa Resconi from the Technical University of Munich and multi-wavelength...
For the first time a team of researchers have discovered two different phases of magnetic skyrmions in a single material. Physicists of the Technical Universities of Munich and Dresden and the University of Cologne can now better study and understand the properties of these magnetic structures, which are important for both basic research and applications.
Whirlpools are an everyday experience in a bath tub: When the water is drained a circular vortex is formed. Typically, such whirls are rather stable. Similar...
Physicists working with Roland Wester at the University of Innsbruck have investigated if and how chemical reactions can be influenced by targeted vibrational excitation of the reactants. They were able to demonstrate that excitation with a laser beam does not affect the efficiency of a chemical exchange reaction and that the excited molecular group acts only as a spectator in the reaction.
A frequently used reaction in organic chemistry is nucleophilic substitution. It plays, for example, an important role in in the synthesis of new chemical...
Optical spectroscopy allows investigating the energy structure and dynamic properties of complex quantum systems. Researchers from the University of Würzburg present two new approaches of coherent two-dimensional spectroscopy.
"Put an excitation into the system and observe how it evolves." According to physicist Professor Tobias Brixner, this is the credo of optical spectroscopy....
13.07.2018 | Event News
12.07.2018 | Event News
03.07.2018 | Event News
20.07.2018 | Power and Electrical Engineering
20.07.2018 | Information Technology
20.07.2018 | Materials Sciences