Certification of Audit Committee Effectiveness: Evidence from a One-Time Regulatory Event in China

Abstract

The China Securities Regulatory Commission (CSRC) launched the Campaign for Strengthening Corporate Governance of Public Companies in 2007. As part of this pilot program, public firms were required to report to CSRC whether their boards had established audit committees and whether these audit committees operated effectively. Using this unique one-time regulatory event in China, we examine whether it is informative for firms to certify the effectiveness of their audit committees. Through analyzing hand-collected data from the campaign reports filed with CSRC, we find that firms with certified audit committee effectiveness are associated with less earnings management and are less likely to have modified audit opinions and delayed filings. Thus, our findings suggest that certification of audit committee effectiveness provides a firm an opportunity to credibly signal that its audit committee functions in substance rather than in appearance.