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Financial reporting quality, audit Risk committee

existence and
fees and risk committees audit pricing
Md. Borhan Uddin Bhuiyan
School of Accountancy, Massey University, Auckland, New Zealand
Ummya Salma
Department of Business Administration in Management Studies, Received 30 January 2019
Bangladesh University of Professionals, Dhaka, Bangladesh Revised 27 May 2019
17 December 2019
Jamal Roudaki 6 March 2020
Accepted 28 March 2020
Department of Financial and Business Systems, Lincoln University,
Christchurch, New Zealand, and
Siata Tavite
School of Accountancy, Massey University, Auckland, New Zealand

Abstract
Purpose – The purpose of this paper is to examine the association between the existence of a risk committee
(RC) in a firm and financial reporting quality. We also investigate whether having an RC has an effect on audit
pricing. We argue that the existence of an RC in a firm contributes to higher financial reporting quality and this,
eventually, affects audit pricing.
Design/methodology/approach – This study uses two different proxies for RC measures and investigates
the impact on financial reporting quality and audit pricing. Multivariate regression analysis and propensity
score matching techniques are both applied to data from the Australian Stock Exchange’s listed companies for
the years 2001–2013.
Findings – The results indicate that the existence of an RC reduces the discretionary accruals; this means the
financial reporting quality improves when RCs are in operation. Our findings also indicate that the existence of
an RC increases audit fees.
Practical implications – The findings from this study will be beneficial to the regulatory authorities
responsible for improving the compliance of corporate governance (CG). An RC can serve as a risk-mitigating
tool in the investment decision-making process. Finally, the results are beneficial for the development of best
practices in CG by promoting the existence of an RC.
Originality/value – This study goes beyond the traditional focus on CG as we use the existence of an RC as an
indicator of better governance practices to mitigate financial and non-financial risk factors. To the best of our
knowledge, this paper is among the first to investigate the consequences for firms operating with RCs. This
issue has implications for investors, auditors, directors and regulators.
Keywords Risk committees, Discretionary accruals, Audit fees, Australia
Paper type Research paper

1. Introduction
We examine the association between the existence of a risk committee (RC) in a firm and the
quality of financial reporting. Further, we investigate whether having an RC affects audit
pricing. The reliability of corporate governance (CG) practices has been under scrutiny
following the recent high-profile corporate collapses earlier in this century. Consequently,
regulators and policymakers are raising concerns over the failure of management and boards
to foresee and effectively address organisational risk management. Increasingly, regulators

The authors acknowledge the thoughtful input of two anonymous referees. An earlier version of this
manuscript was presented to the 28th Asian-Pacific Conference on International Accounting Issues
2016, and the authors sincerely appreciate the comments and feedback from the conference reviewer and Asian Review of Accounting
participants. The authors are thankful to Wei-Guo Zhang, Jahangir Ali and Yuen Teen Mak for their © Emerald Publishing Limited
1321-7348
constructive comments and suggestions. DOI 10.1108/ARA-01-2019-0017
ARA require more significant involvement in, and disclosure related to, boards concerning risk
oversight (Fraser, 2016). Similar to other regulations, the UK’s Financial Reporting Council
2014 and the UK Corporate Governance Code, stipulate: “. . . The board should maintain
sound risk management and internal control systems.” The US Securities and Exchange
Commission (SEC) in 2010 brought in new rules stating: “. . . disclosure about the board’s
involvement in the oversight of the risk management process should provide important
information to investors about how a company perceives the role of its board and the
relationship between the board and senior management in managing the material risks facing
the company. This disclosure requirement gives companies the flexibility to describe how the
board administers its risk oversight function, such as through the whole board or a separate risk
committee or audit committee, for example.”
Globally, the Corporate Governance Best Practice Code recommends that firms should
identify, assess, monitor and manage risk by forming a separate RC. Boards operate through
sub-committees, such as audit, remuneration, nomination and RCs. Boards of directors often
state that one of their prime objectives is to eliminate accounting information risk, which
refers to the risk associated with the variability in accounting amounts (Schrand and Elliott,
1998). Anecdotal evidence suggests that boards of directors should address accounting
information risk, if not the responsibility becomes the role of the audit committee. However,
the role of audit committees has become even more extensive and, therefore, the task of risk
assurance has become challenging, often requiring specialised knowledge, and audit
committee members may not have risk assessment skills. In such a scenario, advocates of
RCs suggest that an RC optimises risk appetite and reviews significant financial and other
risk exposures.
Principle 7 (Recommendation 7.1) of Australian Corporate Governance Principles and
Recommendation (2010) recommends that the board of a listed entity should establish an RC
framework to provide effective internal control systems. Traditionally, the responsibility for
risk management relies on the audit committee. Still, careful measurement should be taken
into consideration as the delegation of risk monitoring demands the RC be focused on
measuring appropriate risk tolerance. Eggleston and Ware (2009) raised a concern that
sharing responsibility may lead to confusions about “where one committee’s responsibility
ends, and another begins”. It is often argued that an RC without a sufficient number of
independent directors, who possess deep knowledge and experience in dealing with the
industry and its critical risks, will lack effectiveness. Defining the risks that fall within
the purview of a separate RC will tend to vary widely based on the nature of the industry
and the complexity of the organisation’s risks; thus, requiring focused expertise to provide
the appropriate oversight. Therefore, whether to establish a separate RC is a facts-and-
circumstances decision based on many factors. Moreover, most board members serve on
several committees already; therefore, adding one more committee can dilute the
board’s focus.
We use the Australian regulatory environment as a setting to address our research
questions. Australia is one of the pioneers who adopted the Corporate Governance Best
Practice Code in 2003 where Recommendation No. 7 emphasises the formation of RCs and
suggests the purpose, composition and policies that require covering by RCs. The
Corporate Governance Best Practice Code 2007 integrated the importance of RCs and
financial reporting and emphasised that: “The integrity of the company’s financial
reporting depends upon the existence of a sound system of risk oversight. . ..” Most recently,
the Corporate Governance Best Practice Code 2014 suggests RCs protect the value of
the firm.
The necessity for an RC is often questioned or ignored in academic research while the
audit committee is operational. The roles of audit committees are under scrutiny and have
been widened following the implementation of the Sarbanes-Oxley Act in 2002. Therefore,
audit committees became busier processing financial reporting practices and liaising with Risk committee
external auditors. While empirical research has overwhelming evidence to justify that the existence and
audit committee solely reviews financial reporting quality, we argue that RCs could have an
impact on the quality of financial reporting through two indirect mechanisms. In the first
audit pricing
mechanism, the audit committee is relieved of work via separation of responsibility so they
may do a better job, and increase financial reporting quality. The second potential mechanism
is a reduction of internal control weakness that then results in a higher quality of financial
reporting. In practice, both mechanisms may co-occur. Presence of an RC might encourage
companies to devote adequate resources and attention to their internal control systems,
which should lead to more reliable financial statements. Donelson et al. (2016) show evidence
that weak internal controls increase the risk of financial reporting fraud by top managers.
Jiang et al. (2010) argued that a weak internal control environment facilitates earnings
management and opportunistic behaviour and reduces the reliability of financial reporting
and evidence that firms with material internal control weaknesses are more likely to receive
going concern audit opinions.
The RC assists the board in carrying out its duties by providing independent and objective
reviews, advice and assistance in developing board policies, monitoring corporate activity
within the scope of its remit and making recommendations to the board for their resolution. It
is not a policy-making body, nor does it have a substantive executive function in its own right.
The role of the RC includes assisting the board with the company’s governance and the
exercise of due care, diligence and skill about risk assessment, treatment strategies and
monitoring. Consistent with the level of risk that is acceptable to the firm, it is the
responsibility of the RC to identify obstacles that may prevent the company from achieving
goals and objectives that impact on the company’s performance or threaten compliance with
the company’s regulatory and legal obligations.
Using a sample of 7,705 firm-year observations from ASX-listed firms in Australia for the
years 2001–2013, we show evidence that, firms with RCs are associated with lower
discretionary accruals. The result suggests that financial reporting quality improves when
RCs are in operations. Furthermore, our findings suggest that the existence of RCs play a
significant role to increase audit fees. These findings are consistent with the notion of
financial reporting quality literature. Our results are robust and used alternative
experiments, such as the Sobel-Goodman test and Propensity-Matched Score analysis.
The remainder of this paper is organised as follows. Section two provides a brief literature
review and development of the hypotheses. The research method, sampling and variable
definitions are explained in section three, while empirical results are presented in section four.
The conclusions, discussion and potential implications of the research are explained in
section five.

2. Literature review and hypothesis development

CG is the system of governing companies in such a way that prevents corporate failures
(Cuomo et al., 2016) and protects shareholders’ value (Tricker and Tricker, 2015). To achieve
these objectives, firms use various sets of governance arrangements, such as the ownership
structure, board composition, managerial incentives and audit and assurance services
(Aguilera et al., 2015). Subsequently, the majority of the existing studies focus on one or more
of these arrangements to investigate their impact on firms’ performance (Aguilera et al., 2015).
These governance arrangements are complex and often depend on the national contextual
setting (Aguilera et al., 2015); therefore, studies in varied contexts found divergent results
when investigating the governance-performance nexus.
Considering the national boundaries, the majority of studies have been undertaken in the
US context (Aguilera et al., 2018), with scant focus on other jurisdictions—including
ARA Australia (Appuhami and Bhuyan, 2015; Turnbull, 1997). Studies using the CG and
performance nexus in Australia can be grouped into board composition (Bonn, 2004; Bonn
et al., 2004; Pham et al., 2011); ownership structure (Pham et al., 2011; Salim et al., 2016; Welch,
2003); executive compensation (Brown et al., 2014; Qu et al., 2018); legislation (Bryce et al.,
2015) and audit committees (Appuhami and Bhuyan, 2015; Bryce et al., 2015; Salim et al.,
2016). The majority of these studies predominantly focus on either board composition (i.e.,
independence and size) or ownership structure (i.e., ownership concentration) while very few
focus on internal controls from an audit of risk management (Hay et al., 2017).
In the extended literature of Australian CG, the relationship of CG mechanisms and
auditing, including audit fees is not straightforward. Hay et al. (2017) in their literature review
concluded that although many research studies have considered this relationship, there is
still considerable uncertainty in the area that needs to be addressed by further research
studies. Nevertheless, as included in the literature, there is a reciprocal effect between CG
mechanisms and an appropriate audit by a reputable audit firm (Hay et al., 2017).
The RC is considered to be an essential element of risk governance as it is expected to
report to the board on the issues about the overall risk management practices (Liu, 2012).
Aabo et al. (2005) document that taking risk has become the primary threat to firms, but if
dealt properly it might become an opportunity for the firm. However, Cumming and Hirtle
(2001) argue that individual risk management is much less critical when compared to firm-
wide risk management practices or integrated risk management techniques. The Corporate
Governance Best Practice Code recommends that directors who play a role in advancing the
benefits of sound risk management will need to be appropriately qualified. Subramaniam
et al. (2009) identify that an RC accomplishes four different tasks. First, it considers the
organisation’s risk management strategy; second, it evaluates the organisation’s risk
management operations; third, it assesses the organisations’ financial reporting and fourth, it
ensures that the organisation meets the applicable laws and regulations in practice.
Globally, regulators and professionals are calling for the adoption and improvement of CG
rules and codes over the risk activities of boards following the concern that boards have failed
to address corporate risk-taking and risk management properly. Especially after the global
financial crisis, stock market legislators had a renewed appreciation about the interests and
protection of stakeholders and requested that listing requirements be incorporated into risk
management techniques and internal control mechanisms. Business managers are becoming
more responsive to changing circumstances by integrating risk management policies into
their operating procedures (Brown et al., 2009). Consequently, developed countries are more
concerned with risk management reforms and their incorporation into a firm’s governance
structure. More countries are joining the EU and the US in encouraging the formation of an
RC to manage the operational risks of firms and inform top management of risk analyses.
Academic research has overwhelming evidence suggesting that good CG practices
enhance higher disclosure practices. Therefore, the RC, as a tool of good CG, is expected to
increase risk disclosure in the presence of RCs. Using a sample of financial firms from Gulf
Cooperation Council (GCC) countries; Al-Hadi et al. (2016) find that firms with a separate RC
are associated with greater market risk disclosure, and the effect varies across the life cycle
stages of the firm. They also suggest that the qualifications of the RC and its size have a
significant and positive impact on market risk disclosures. Using the context of implementing
International Financial Reporting Standard 7 in Bangladesh; Nahar et al. (2016a) categorise
risk disclosure to markets, credit, liquidity and operational and equities, as evidence that risk
disclosure increases when an RC is operational. Using a sample from Australian financial
institutes, Tao and Hutchinson (2013) examines the role of compensation and RCs in
managing and monitoring risk behaviour during the period of the global financial crisis.
They argue that RCs reduce information asymmetry and show evidence that the composition
of the risk and compensation committees is positively associated with risk, which, in turn, is
associated with the firms’ performance. Regarding the perspective of the emerging market Risk committee
setting, Nahar et al. (2016b) examined the risk governance characteristics and performance of existence and
financial institutes. They posit that risk governance, such as risk disclosure, the number of
RCs and the existence of a risk management unit improve risk management and risk
audit pricing
monitoring, are likely to be reflected in the banks’ performance.
A stream of academic research focuses on enterprise risk management (ERM) and the
value associated with risk management practices. Gordon et al. (2009) examine the
relationship between ERM and firm performance and reveal a significant positive association
between firm performance and ERM strategies. In contrast, McShane et al. (2011) document
no relationship between firm values and ERM rating, so the inconclusive results in the
literature about ERM and firm performance are due to difficulties with ERM identification
and measurement (McShane et al., 2011). Moreover, Beasley and Frigo (2010) highlight that
risk management practices vary widely across firms and firm performance depends upon
risk management mechanisms. As discussed earlier, most corporate failures are due to poor
risk management in terms of the governance structure. Some studies show a positive
association between risk management and firm performance (Hoyt and Liebenberg, 2011;
Lawrence et al., 2018), while others document a negative or no relationship between risk
management and firm performance. McShane et al. (2011) and Pagach and Warr (2010) both
refer to the inconsistent findings in the current literature about RCs.
The extant literature also holds divergent views about whether the responsibility for ERM
rests with the board of directors, the audit committee or risk management committees (RMCs)
(Cohen et al., 2014). However, the formation of a RMC is considered a good CG practice and
supports the industry’s health and strength. Nevertheless, Liebenberg and Hoyt (2003)
document that ERM has significant issues with measurements and identification in
organisational settings. Many researchers use a simple proxy measurement for ERM, such as
the existence of a chief risk officer (CRO) or senior risk officer (Beasley et al., 2008; Liebenberg
and Hoyt, 2003). Beasley et al. (2008) document that is hiring a CRO was associated with the
notion that a firm would use corporate resources in mitigating risk. However, Lundqvist
(2014) argue that hiring an individual like a CRO does not reflect a well-implemented and
effective ERM system. From the perspective of signalling theory, the position of the CRO is
merely a signal to attract existing or potential investors and to enhance a positive corporate
image (Sun et al., 2010) but, for firms, it signals not following through with ERM
implementation (Lundqvist, 2014). On the contrary, a well-defined RMC reflects better
governance practices in mitigating firms’ risk for better firm performance.
The literature examining the use of RMCs as a measure for ERM is scarce, and the topic
has not been extensively explored (Ng et al., 2012). The study carried out by Ng et al. (2012)
closely resembles the present study, where RMC characteristics, including size, independence
and meeting frequency, serve as a measure for ERM. However, Ng et al. (2012) limit their
study to the impact of RMC characteristics on firms’ risk-taking, where the RMC
characteristics selected resemble similar functions within an audit committee and are
consistent with CG mechanisms. This notion encourages using both the audit committee and
RMC as a measure of ERM for better understanding and generalisation. The present study
overcomes this gap in the literature by utilising both the audit committee and RMC to
examine the association between firms’ ERM practices and performance.
While the existence of an RC is voluntary, in practice, proponents argue that RCs strengthen
the oversight of board risks because they provide dedicated resources to continually evaluate
the firm’s risk appetite and risk profile and to validate the firm’s internal controls surrounding
risk management (Moore and Brauneis, 2008). However, opponents argue that an RC impairs
the board’s overall ability to fully integrate risk assessment into their monitoring of the
strategies and operations of the firm as a whole (Bates and Leclerc, 2009). The existing research
indicates that audit committees retain overall responsibility for risk oversight (Hay et al., 2006).
ARA Tonello (2012) proposed that the existence of an RC in parallel with an operational audit
committee is essential as audit committees may not have sufficient skills and time to do the risk
assessment job themselves. Nevertheless, audit committees have many responsibilities focused
on financial reporting, and an extension of the audit committee’s role might be burdensome
(Song and Windram, 2004; Tonello, 2012; Vera-Munoz, 2005).
Traditionally, the risk management function, which includes credit risk management,
asset management activities and ensuring financial reporting quality, was performed by the
audit committee, but Ng et al. (2012) suggest that independent RCs are required due to firms
having more extensive operational risks, both financial and non-financial, that might, in
technical ability, go beyond the scope of an audit committee. Fraser and Henry’s (2007)
evidence reveals that an audit committee has a lack of expertise in risk management.
Similarly, Brown et al. (2009) also document that risk management no longer remains the duty
of the audit committee alone due to increasing complexities within business models.
Subramaniam et al. (2009) posit that an RC mitigates information asymmetry and reduces
costs by addressing the management risk of financial reporting. Yatim’s (2010) evidence
showed that board meeting frequencies increase when a firm has an operating RC. Vafeas
(1999) argues that firms with higher meeting frequencies are likely to improve monitoring
quality. Overall, the presence of RC enhances the quality of internal control which is expected
to improve financial reporting quality by reducing opportunistic fraudulent behaviour (Jiang
et al., 2010; Donelson et al., 2016). Lawrence et al. (2018) identified that the presence of RC
indicates a firm has operational risk and argued that operational risk is an integral
component of internal control mechanism. Consistent with the notation of the above
discussion, we hypothesise as follows:
H1. Existence of an RC in a firm is associated with financial reporting quality.
We now move our attention to examine whether the RC has any effect on the audit pricing.
Empirical research shows evidence that business risk is priced by the auditor. A firm with an
effective RC could signal a stronger internal control system leads to lower business risk,
which may affect audit pricing. Hay et al. (2006) evidence that stronger CG determines audit
price, and similarly, RC indicates better CG, which is likely to influence audit fees. Firms with
lower (higher) financial reporting qualities are likely to increase (decrease) information
asymmetry and agency conflicts that result in higher audit prices because the lower quality of
accounting information processing requires higher audit efforts (Hribar et al., 2014; Lobo and
Zhao, 2013) and has more potential for litigation risks (Chung et al., 2013; Skinner and
Srinivasan, 2012).
Abdullah and Said (2019) argue that the existence of RC signals higher-quality CG results
in lower corporate crime. Hines et al. (2015) examined the association between audit price and
the existence of an RC and evidence that audit fees increase in the presence of an RC. Using
the demand perspective of auditing, Hines et al. (2015) posit that the presence of an RC
indicates the organisation’s risk profile, which then demands higher monitoring and leads to
more audit efforts and audit fees. In contrast, De Lacy (2005) strongly recommends that an RC
consider the complexity of modern business environments and economic uncertainty more
effectively. Yatim (2010) suggests that the existence of a separate RC can enhance internal
control to mitigate risk attributes, and this may reduce the audit effort and result in fewer
audit hours and audit fees. Daly and Bocchino (2006) found that audit committee members are
uncomfortable with the overwhelming workload required for risk oversight. Subramaniyam
et al. (2009) posit that establishing an RC promotes the strength of a firm with assists
organisations in achieving their objectives and secure the reputation as well as provide
improved quality financial reporting. Therefore, we hypothesise as follows:
H2. Existence of an RC in a firm is associated with the audit price.
3. Research design and measurement of variables Risk committee
3.1 Sample selection existence and
We use ASX-listed companies in Australia as our primary source of samples. We start with
an initial sample of 15,120 firm-year observations, from 2001 to 2013, and match those with
audit pricing
the Global Vantage database. Manual matching of the company name is conducted between
SIRCA and Global Vantage in the absence of consistent matching identification (Tickers) at
Global Vantage. A total of 9,506 firm-year observations remain with non-missing data for
2001 to 2013. A total of 1,801 firm-year observations about the financial and regulatory
industries are excluded because the formation of an RC is a statutory obligation in the
financial sector. Also, the measurement of discretionary accruals and the standard audit fee
determinant model is different for financial institutes. Considering the voluntary nature of RC
formation in Australia, the study is restricted to non-financial institutes. Thus, the final
sample size reduces to 7,705 firm-year observations. Noteworthy to mention is that the final
sample does not include any firms, which has an operational CRO. Table 1 further details the
sample selection process.
3.2 Variable measurements
The study variables and their measurement are explained in the following sub-sections.
3.2.1 Dependent variables. 3.2.1.1 Financial reporting quality. Financial reporting quality
is a multi-dimensional concept. Therefore, any single proxy is unlikely to cover all facets of
financial reporting quality. We use performance adjusted discretionary accruals as a measure
of financial reporting quality. Discretionary accruals are computed through the cross-
sectional modified Jones model controlling for performance (Dechow et al., 1995; Kothari et al.,
2005). The following equation is estimated for all firms in the same industry (using SIC two-
digit industry codes) with at least eight observations in an industry needed in a particular
year to obtain industry-specific parameters to calculate the non-discretionary component of
total accruals; discretionary accruals are the residual of the following equation:
DACCt ¼ α0 ð1=Assetst−1 Þ þ α1 ΔSalest  ΔRECEIVABLESt þ α2 PPEt þ α3 ROAt−1 þ εt

All variables are deflated by lagged assets. DACC is the unsigned discretionary accruals
which are used in the primary analysis.
3.2.1.2 Audit fees. Consistent with previous studies, higher audit fees are expected for
firms with higher client complexity (larger size, more mergers and acquisitions, with new
debt/equity issuance in the subsequent year, a higher market-to-book ratio, a larger foreign
sales percentage, more business segments, larger pension plans or reinstatement); higher
financial risk (higher leverage, lower ROA, a loss, larger special items, higher stock return
volatility); higher inherent risk (a larger inventory and receivables); more management of
earnings (both accruals and real activity manipulations) and engagement attributes (with a
fiscal year-end on 31 December and a larger gap between the fiscal year-end and the earnings
announcement date). Given the mixed results in previous research, no prediction is made

Firm-year
Details observations

Initial firm-year observations 15,120

Less: Firms with missing financial information or corporate governance details 5,614
9,506
Less: Firms that belong to regulated industry and financial institutions, banks or 1,801
insurance companies Table 1.
Total firm-year observations 7,705 Sample distribution
ARA about the signs of the coefficients for sales growth, firm age, and audit tenure. We use the
natural logarithm of firm audit fees (Ln(AF)).
3.2.2 Independent variables. 3.2.2.1 Risk committee. The study uses two different
measures for the existence of an RC. Primarily, a dummy variable (RISKDUM) that is
considered to be 1 when a company forms an RC and 0 otherwise. Finally, a continuous
variable of RC members (RISKMEM) is considered. RISKMEM measures the natural
logarithm for each RC member.

3.3 Regression specification

To measure the effectiveness of the RC on discretionary accruals, the following regression
equation is used:
DACCt ¼ m0 þ m1 RISKðRISKDUM or RISKMEMÞ þ m2 SIZE þ m3 LEV þ m4 LOSS
þ m5 OCF þ m6 SALEGR þ m7 BIG4 þ m8 CEODUAL þ m9 INDPEN
þ m10 BDSIZE þ mi INDUSTRYEFFECT þ mj YEAREFFECT þ    . . . . . . (1)

Equation (1) addresses our Hypothesis 1. In equation (1), our coefficient of primary interest is
m1. A positive (negative) coefficient of m1 will imply higher (lower) discretionary accruals by
the firms with an RC indicating poor (better) financial reporting quality. A brief explanation
of the control variables used in the regression analysis follows.
Empirical research to date has resulted in contrasting viewpoints on firm size (SIZE) and
earnings management. Barton and Simko (2002) provide evidence that large firms engage in
more earnings management as they might face huge pressure to meet-or-beat analysts’
expectations. However, large firms might have better internal control practices in comparison
to relatively small-sized firms and, therefore, will have lower earnings management in
practice. SIZE is measured as the natural logarithm of total assets. For firm leverage (LEV), a
positive association is expected. Sweeney (1994) found that firms with higher leverage engage
with income and increasing earnings management to conduct favourable debt negotiations.
Leverage (LEV) is the proportion of total liabilities to total assets. Firms with negative
earnings (LOSS) have a higher probability of managing earnings; therefore, a positive
association between LOSS and DACC is anticipated. LOSS is a dummy variable, assigned a
value of 1 when the firm experiences a negative profit in the current financial year and
0 otherwise. Consistent with earlier findings, a negative association between OCF and DACC
is expected (Barth et al., 2001). OCF is the proportion of total cash flow from operating
activities to total assets. Again, a positive association between firm volatility (SALEGR) and
earnings management (DACC) is anticipated because highly volatile firms tend to smooth
earnings to meet analysts’ expectations. SALEGR is the standard deviation of sales for the
previous four consecutive years. A negative association between audit quality (BIG4) and
earnings management is predicted as highly qualified auditors will be more vigilant in
eliminating financial reporting risks by minimising earnings management. BIG4 is a dummy
variable assigned a value 1 and 0 otherwise.
Furthermore, several CG variables (CEODUAL, INDPEN, and BDSIZE) are included in
the regression equation to indicate whether CG will reduce earnings management. As with
the existing contentions, this study anticipates a positive association for CEODUAL and
BDSIZE but a negative association with INDPEN as firms with more independent directors
will reduce earnings management by vigilant monitoring. CEODUAL is a dummy variable
assigned a value of 1 if both the CEO and chairman are the same person and 0 otherwise. We
measure BDSIZE as the natural logarithm of actual board members. INDPEN is the
proportion of independent directors in a firm in comparison to the total board size. Finally, we
control the industry and year effect. All the continuous variables are winsorised at the top and Risk committee
bottom 1% of their distribution. existence and
To measure the impact of an RC on audit pricing, the following regression equation has
been developed:
audit pricing
LnðAFÞt ¼ v0 þ v1 RISKðRISKDUM or RISKMEMÞ þ v2 SIZE þ v3 LEV þ v4 LOSS
þ v5 OCF þ v6 SALEGR þ v7 BIG4 þ v8 FYE þ v9 ARL þ v10 GC
þ v11 CEODUAL þ v142 INDPEN þ v13 BDSIZE þ vi INDUSTRYEFFECT
þ vj YEAREFFECT þ    . . . . . . (2)

Equation (2) addresses Hypothesis 2. In equation (2), the coefficient of primary interest is v1; a
negative association between audit pricing (LnðAFÞt ) and RISKðRISKDUM or RISKMEM Þ
is expected. For the control variables, we control for client size (Hay et al., 2006) using the
natural log of total assets (SIZE). Consistent with earlier findings, a positive association
between SIZE and LnðAFÞt is anticipated. A positive association between LEV and LnðAFÞt is
also expected as a firm’s default risk is higher when external entities provide more loans.
Leverage (LEV) is the proportion of total liabilities to total assets. Firms with negative profits
have higher risks and auditors charge higher fees to cover the need for greater scrutiny;
therefore, a positive association is expected between LOSS and LnðAFÞt . LOSS is a dummy
variable assigned a value of 1 if the profit of this financial year is negative and 0 otherwise. For
this study, the quality of the auditor is considered relevant as reputable auditors conduct more
rigorous audit processes which, in turn, require more fees to be charged and, thus, a positive
association between BIG4 and LnðAFÞt is expected. BIG4 is a dummy variable assigned the
value 1 if a BIG4 auditor audits the firm. The timing of the audit service is also measured, as
firms with a longer reporting lag (ARL) require relatively more time to conduct audit activities
and the audit is probably more complex; thus, a positive association is expected. Firms with
going concern (GC) opinions have a higher audit risk and, therefore, higher fees are expected to
eliminate litigation risks, and so a positive association between GC and LnðAFÞt is most likely.
GC is the dummy variable assigned as 1 if the firm receives a going concern opinion in the
respective financial year. Firms with CEO-duality indicate a centralised governance structure,
which might signal higher audit risks and, thus, a positive association is expected. A large
board shows more diversified opinions, which could lead to a lack of coordination and may
result in higher audit fees. Finally, the study controls for board independence (INDPEN) and
expects a positive association with audit fees as independent directors will demand high-
quality audits as part of directors’ responsibility and vigilance. All the other measures,
CEODUAL, BDSIZE and INDPEN, are consistently aligned with Equation (1), as discussed.

4. Results
This results presentation starts with the descriptive statistics, followed by an illustration of the
mean differences test, then the correlation, regression and additional analyses are explained.

4.1 Descriptive statistics

Table 2, Panel A, presents descriptive statistics. A total of 26% of the firm-year observations
have an RC. The average board size of the sample firms is 2.28 (median 5 2.30) and an
average 39.65% (median 5 38%) of directors are independent in the sample period. On
average, 72.83% of the firm-year observations have CEO-duality. The average value of
discretionary accruals (DACC) and audit fees (Ln(AF )) are 0.099 (median 5 0.055) and 11.835
(median 5 11.68), respectively. A total of 64% of firms are audited by BIG4 auditors and
experience a going concern opinion (GC) for 10.51% of the firm-year observations. Firms have
 ARA

Table 2.

the dependent and

independent variables
Descriptive statistics of
Panel A: descriptive analysis
Variable(N 5 7,705) Mean Std. dev. Min Median Max

DACC 0.099 0.133 0 0.055 1.47

Ln(AF ) 11.825 1.431 7.960 11.68 21.284
RISKDUM 0.259 0.438 0 0 1
RISKMEM 0.820 1.571 0 0 14
SIZE 16.230 5.2683 4.09 17.65 25.59
LEV 0.189 0.459 0 0.10 11.81
LOSS 0.432 0.495 0 0 1
OCF 0.054 0.919 61.92 0.03 9.65
SALEGR 1.819 11.622 1.92 0.07 192.97
BIG4 0.639 0.480 0 1 1
FYE 0.136 0.342 0 0 1
ARL 2.267 1.447 0 1.898 2.656
GC 0.105 0.306 0 0 1
CEODUAL 0.728 0.444 0 1 1
INDPEN 0.396 0.202 0 0.38 1
BDSIZE 2.279 0.449 1.1 2.3 3.5

Panel B: mean difference test

RISKDUM 5 1 RISKDUM 5 0
Variables N 5 2000 N 5 5,705 t-statistics

DACC 0.11 0.08 8.69***

Ln(AF ) 11.54 12.63 30.91***
SIZE 16.24 16.20 1.27
LEV 0.19 0.18 1.32
LOSS 0.48 0.29 14.80***
OCF 0.07 0.01 3.60***
SALEGR 2.04 1.17 3.19***
BIG4 0.59 0.77 13.89***
FYE 0.14 0.12 3.49***
ARL 1.98 1.48 1.43

(continued )
Panel B: mean difference test
RISKDUM 5 1 RISKDUM 5 0
Variables N 5 2000 N 5 5,705 t-statistics

GC 0.12 0.06 8.18***

CEODUAL 0.73 0.71 1.26
INDPEN 0.40 0.37 4.93***
BDSIZE 2.19 2.52 30.44***

Panel C: correlation analysis

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

DACC (1) 1
RISKDUM(2) 0.10*** 1
RISKMEM(3) 0.09*** 0.88*** 1
SIZE(4) 0.18*** 0.01 0.02** 1
LEV(5) 0.08*** 0.01 0.01 0.03** 1
LOSS(6) 0.23*** 0.17*** 0.17*** 0.27*** 0.01 1
OCF(7) 0.13*** 0.03*** 0.04*** 0.14*** 0.20*** 0.20*** 1
SALEGR(8) 0.09*** 0.03*** 0.04*** 0.03*** 0.003 0.08*** 0.01 1
BIG4(9) 0.13*** 0.16*** 0.16*** 0.20*** 0.001 0.24*** 0.09*** 0.06*** 1
CEODUAL(10) 0.08*** 0.02 0.04*** 0.61*** 0.02* 0.16*** 0.07*** 0.02** 0.13*** 1
INDPEN(11) 0.02* 0.06*** 0.03*** 0.11*** 0.03** 0.05*** 0.03*** 0.01 0.01 0.11*** 1
BDSIZE(12) 0.19*** 0.32*** 0.33*** 0.29*** 0.01 0.39*** 0.09*** 0.08*** 0.40*** 0.23*** 0.12*** 1
Ln(AF) (13) 0.23*** 0.33*** 0.33*** 0.29*** 0.05*** 0.47*** 0.12*** 0.09*** 0.44*** 0.11*** 0.06*** 0.47*** 1
GC (14) 0.20*** 0.09*** 0.09*** 0.22*** 0.14*** 0.32*** 0.16*** 0.01 0.16*** 0.12*** 0.04*** 0.18*** 0.02 1
ARL (15) 0.01 0.01 0.01 0.03** 0.01 0.02* 0.01 0.01 0.02 0.01 0.02** 0.01 0.01 0.17** 1
Note(s): ***, **, * indicate the variables are significant at the 1, 5 and 10% levels
audit pricing
existence and
Risk committee

Table 2.
ARA an average 184-days audit reporting lag (ARL) and the mean leverage (LEV) is 0.1889
(median 5 0.10). A total of 43% of firm-year observations have generated a negative profit
within the sample year observations.

4.2 Mean difference test

Table 2, Panel B, presents the results of the mean difference tests. The results show the
differences between the firm-specific variables, which have an RC (RISKDUM 5 1), and firms
with the non-RC (RISKDUM 5 0) category. The results show that RC affiliated firms
generate less discretionary accruals (DACC) and have a higher audit and non-audit fee
requirements. Firms that experience a higher going concern opinion (GC) and more
experience with negative profits (LOSS) have no RC within the firm-year observations
sampled. Firms with more directors on the board (BDSIZE) have an RC but, interestingly,
firms with lower numbers of independent directors (INDPEN) have fewer RCs as INDPEN
has a mean of 0.40 for firms with an RC – higher than 0.37 for firms without an RC. All the
results are statistically significant at the 1% level of significance.

4.3 Correlation analysis

Table 2, Panel C, reports the results of the bivariate correlation analysis. The results reveal
that discretionary accruals (DACC) are lower when firms do not have an RC. The results
indicate that the pairwise correlation between DACC and RISKDUM is significantly negative
(coefficient 5 0.10, p < 0.01). Furthermore, the results demonstrate that firms with RCs have
higher audit fees (Ln(AF )) and the findings (coefficient 5 0.33; p < 0.01) are statistically
significant at the less than the 1% level of significance. Consistent with earlier findings, firms
with more directors on the board (BDSIZE) (correlation 5 0.32, p < 0.01), have higher
operating cash flows (correlation 5 0.03, p < 0.01), are audited by big4 firms (BIG4), and tend
to have an RC operation in the CG system. Nevertheless, large firms have lower discretionary
accruals (correlation 5 0.18, p < 0.01) but highly levered firms had more discretionary
accruals (correlation 5 0.08, p < 0.01) during the sample firm-year observations.

4.4 Regression analysis

Table 3 presents the results for H1, which hypothesised that the existence of an RC affects
that firm’s financial reporting quality, proxied as discretionary accruals. Two different
measures (RISKDUM and RISKMEM) are implemented to capture the impact of RCs
existence. Each of the RC measures is deployed in a single regression equation. The
regression results for RISKDUM have a negative coefficient with discretionary accruals
(DACC). The coefficient between RISKDUM and DACC is 0.008 (t-statistic 5 2.82), which
indicates the finding is statistically significant at the 1% level. Consistent with the earlier
specification, this finding provides similar evidence as to the other specification (RISKMEM).
The coefficient between RISKMEM and DACC is 0.002 (t-statistic 5 1.80*), which
indicates that the finding is statistically significant at the 10% level. Thus, H1 is supported. In
terms of economic significance, the reported coefficient suggests a 0.314 basis point decrease
in DACC for one standard deviation increase in RISKMEM (0.002 (coefficient of RISKMEM)
* 1.571 (Standard Deviation of RISKMEM)).
For the control variables, the findings indicate that large firms (SIZE) and higher
operating cash flow generating firms (OCF) have lower discretionary accruals. Firms with
higher leverage (LEV), negative profits (LOSS), and higher sales growth (SALEGR), have
more discretionary accruals. For the CG control variables, the results show that firms with a
large board (BDSIZE) and with more independent directors (INDPEN) have higher
discretionary accruals for both RC measures. The results are statistically significant at a
better than 10% level of significance. The adjusted-R2 for both the specifications is 33%.
 DACCt ¼ m0 þ m1 RISKðRISKDUM or RISKMEMÞ þ m2 SIZE þ m3 LEV þ m4 LOSS þ m5 OCF þ m6 SALEGR þ m7 BIG4
þ m8 CEODUAL þ m9 INDPEN þ m10 BDSIZE þ mi INDUSTRY _EFFECT þ mj YEAR_EFFECT þ Error . . . . . . . . .
DEP 5 DACC Specification 1 (RISKDUM) Specification 2 (RISKMEM)

Constant 0.342 (15.08***) 0.344 (15.15***)

RISKDUM 0.008 (2.82***) –
RISKMEM – 0.002 (1.80*)
SIZE 0.020 (18.68***) 0.020 (18.77***)
LEV 0.021 (6.66***) 0.021 (6.67***)
LOSS 0.008 (2.30**) 0.010 (2.31**)
OCF 0.004 (2.69**) 0.004 (2.65**)
SALEGR 0.001 (5.71***) 0.002 (5.70***)
BIG4 0.004 (1.15) 0.003 (1.17)
CEODUAL 0.003 (0.75) 0.003 (0.73)
INDPEN 0.012 (1.75*) 0.013 (1.75*)
BDSIZE 0.022 (4.63***) 0.021 (4.59***)
Industry control Yes Yes
Year control Yes Yes
Firm cluster Yes Yes
Adj R-squared 0.145 0.149
F-stat 33.62*** 33.56***
N 7,705 7,705
Note(s): ***, **, * indicate the variables are significant at the 1, 5 and 10% levels
audit pricing
existence and

Impact of risk
Risk committee

reporting quality
Table 3.

committee on financial
ARA Table 4 presents the results for H2 where it is hypothesised that the existence of an RC has
an impact on audit fees (Ln(AF)). To address the H2, we execute Equation (2). Interestingly,
the coefficient of the existence of an RC (RISKDUM) and audit pricing (Ln(AF)) is positive
which indicates that firm with RC has higher audit fees. The association between RISKDUM
and (Ln(AF)) is (coefficient 5 0.054, t-statistic 5 3.46) statistically significant at 1% level. In
regards to the other specification of RC (RISKMEM), the association between RISKMEM and
(Ln(AF)) is consistently positive (coefficient 5 0.012, t-statistic 5 2.93) and statistically
significant at 1% level. Thus, H2 is accepted.
For the control variables, the results reveal that large firms (SIZE), firms with higher
leverage (LEV) and firms are audited by big4 auditors (BIG4) have higher audit fees.
Consistent with the existing auditing literature, our results evidence that firm which
experienced going concern opinions (GC) have a higher audit price. The coefficients are
statistically significant at better than the 1% level. Also, we find that firms with a large board
and higher independent directors have higher audit fees. The adjusted-R2 for both the
specifications is 73%. Following Petersen (2009), our test statistics are based on clustered
standard error. Our reported t-statistics shown in parentheses are based on standard errors
that are robust to the presence of heteroskedasticity and clustered by firm. All specifications
include year and 2-digit SIC industry dummies.
Additional tests
(1) Propensity-matched score analysis
The propensity score matching (PSM) method implies an approach to controlling for self-
selection by matching sample firms with control firms having similar characteristics
according to the function of covariates (Rosenbaum and Rubin, 1983, 1985). Following the
steps for propensity score matching, we divided our sample into two groups: RISKDUM 5 1
and RISKDUM 5 0. The former is the treated group, while the latter is the control group. For
each of the observations in the treated and control groups, we calculate the propensity
score—that is, the probability of belonging to RISKDUM 5 1 and RISKDUM 5 0, using a
logit regression model. We use all the control variables in both the accruals and audit fee
regression in constructing the propensity scores. Then, for each observation of the treated
sample, we find the nearest neighbour – the observation from the control group for which the
absolute value of the difference in propensity scores is the minimum – from the control group.
We match this with a replacement. We call this sample the matched sample. Next, we test if
there is a statistically significant difference in the firm-specific variables between firms in the
treated group and those in the matched group. We find that none of the variables is
significantly different between the related and control groups.
Table 5, Panel A, shows the PSM matching results. We follow the nearest-neighbour
procedure with replacements picked from a single control firm according to the closest
propensity score. We find negative association support for our hypothesised relationship
between the existence of RC and financial reporting quality (DACC). Further, we find that a
positive association exists between the existence of RC and audit fees LnðAFÞt. The
coefficient of RISKDUM on DACC is 0.016 (t-statistic 3.71) and is statistically significant
at the 1% level. Further, the association between RISKDUM and LnðAFÞt is 0.046 (t-statistic
2.03), indicating an audit fees increase when an RC is operational. Results are consistent using
the alternative proxy (RISKMEM) for the RC. Also, the results remain similar if we use radius
instead of the nearest neighbour techniques.
(2) Is the existence of an expert in the RC beneficial?
RC members should be knowledgeable about risk governance and management and about
the risks organisations face and methods for managing them. It may be advantageous to have
 LnðAFÞt ¼ v0 þ v1 RISKDUM þ v2 SIZE þ v3 LEV þ v4 LOSS þ v5 OCF þ v6 SALEGR þ v7 BIG4 þ v8 FYE þ v9 ARL þ v10 GC
þ v11 CEODUAL þ v12 INDPEN þ v13 BDSIZE þ vi INDUSTRY _EFFECT þ vj YEAR_EFFECT þ Error . . . . . . . . .
Specification 1 Specification 1
DEP 5 LnðAFÞt Dep 5 LnðAFÞt Dep 5 LnðAFÞt

Constant 2.78 (20.14***) 2.77(20.06***)

RISKDUM 0.054 (3.46***) –
RISKMEM – 0.012(2.93***)
SIZE 0.415 (63.70***) 0.415 (63.81***)
LEV 0.209 (10.84***) 0.209 (10.83***)
LOSS 0.115 (5.13***) 0.112 (5.12***)
OCF 0.059 (6.00***) 0.060 (6.04***)
SALEGR 0.003 (3.96***) 0.003 (3.95***)
BIG4 0.355 (17.48***) 0.356 (17.51***)
FYE 0.008 (0.33) 0.009 (0.35)
ARL 0.001 (0.18) 0.004 (0.64)
GC 0.315 (10.30***) 0.314 (10.28***)
CEODUAL 0.026 (0.102) 0.026 (1.04)
INDPEN 0.145 (3.29***) 0.144 (3.15***)
BDSIZE 0.394 (13.59***) 0.395 (13.43***)
Industry control Yes Yes
Year control Yes Yes
Firm cluster Yes Yes
Adj R-squared 0.7392 0.7325
F-stat 488.09*** 487.88***
N 7,705 7,705
Note(s): *** indicate the variables are significant at the 1% level
audit pricing
existence and

committees on
Impact of risk
Risk committee

audit fees
Table 4.
ARA Panel A: propensity score matching (PSM)
Variables Treated [RISKDUM 5 1] Control [RISKDUM 5 0] t-test p-value

Descriptive analysis using the PSM technique

DACC 0.098 0.097 0.91 0.39
Ln(AF) 11.823 11.826 1.01 0.87
SIZE 16.21 16.25 0.88 0.74
LEV 0.187 0.190 0.62 0.23
LOSS 0.432 0.434 0.12 0.32
OCF 0.054 0.053 0.29 0.41
SALEGR 1.823 1.820 0.94 0.33
BIG4 0.644 0.641 0.85 0.67
FYE 0.136 0.134 1.51 0.26
ARL 2.265 2.265
GC 10.45 10.51 1.11 0.82
CEODUAL 0.727 0.723 0.53 0.65
INDPEN 0.397 0.391 1.32 0.42
BDSIZE 2.289 2.283 1.13 0.31

Variables DEP 5 DACC DEP 5 Ln(AF)t

Regression analysis using the PSM technique

Constant 0.273*** [13.71] 0.198*** [13.25] 3.29*** [20.88] 2.65*** [17.54]
RISKDUM 0.016*** [3.71] – 0.046** [2.03] –
RISKMEM – 0.019*** [3.95] – 0.064** [2.17]
Control variables Controlled Controlled Controlled Controlled
Industry control YES YES YES YES
Year control YES YES YES YES
Firm cluster YES YES YES YES
F-statistics 71.43 69.51 412.66 437.35
Adj R-squared 0.254 0.295 0.739 0.745
N 4,000 4,000 4,000 4,000
Note(s): ***, **, * indicate the variables are significant at the 1, 5 and 10% levels

Panel B: Path Analysis

RISKDUM
0.87

-0.03
DACC Ln(AF)
0.2 -1.96

-0.04 0.89
ACMEETDUM

Table 5.
Endogeneity test e1 = 0.87 e2 = 0.77

RC members with knowledge about business activities, processes and risks appropriate to
the size and scope of the enterprise. The ASX Corporate Governance Principles and
Recommendations 2014 recommends that an RC member should have the necessary technical
knowledge, and a sufficient understanding of the industry in which the entity operates, to be
able to discharge the committee’s mandate effectively. However, the regulations give no
direct indication to identify the desired attributes of expertise to be held by RC members. The
extent risk management literature suggests that the RC is required to address strategic risk, Risk committee
operational risk, and financial risks. In the absence of widely accepted credentials about an existence and
RC member’s expertise, we understand that an RC comprising a member who has experience
working either as a CEO, CFO, or chairman may possess the necessary leadership skills and
audit pricing
expertise. To capture the effects of expertise, we develop a continuous variable (RISK_EXP)
and rerun equations (1) and (2). Our findings reveal that the association between DACC
and RISK_EXP is negative (coefficient 5 0.004, t-statistics 5 2.04**) and statistically
significant at the 5% level. Our findings indicate that an expert RC member reduces
discretionary accruals. Further, we find that the coefficient between LnðAFÞt and RISK_EXP
is positive (coefficient 5 0.038, t-statistics 5 1.99) and statistically significant at the 5% level.
(3) Is a more independent director in the RC desirable?
The ASX Corporate Governance Principles and Recommendations 2014 recommends that an
RC should be of sufficient size and independence to be able to discharge the committee’s
mandate effectively. The extent CG literature emphasises the independence of the different
board sub-committees, including the RC, because each committee has unique functions and
works well only for specific criteria and the requirement for the independent committee
member can contribute to the quality of a firms’ financial reporting quality and audit risk in a
different dimension (Yeh et al., 2011). We introduce a continuous variable to capture the
effect of the RC’s independent director (RISK_IND) and rerun both equations (1) and (2).
We find that our results are consistent with the primary findings. Our findings reveal
that the association between DACC and RISK_IND is negative (coefficient 5 0.003,
t-statistics 5 1.99**) and statistically significant at the 5% level. Our findings indicate that
an expert RC member reduces discretionary accruals. Further, we find that the coefficient
between LnðAFÞt and RISK_IND is positive (coefficient 5 0.007, t-statistics 5 2.24) and
statistically significant at the 5% level.
(4) Does the RC affect audit committee meeting frequencies?
As indicated earlier, that RCs could have an impact on financial reporting quality through the
separation of responsibilities that reduces the workload of the audit committees and lower
operating risks. Therefore, it is likely that RC existence reduces audit committee meeting
frequencies, which could potentially evidence of change in responsibility and workload. To
examine such conjecture, path analysis is conducted to find both the direct and indirect
impact of DACC on Ln(AF). Table 5, Panel B reports the findings of path analysis, and the
results are consistent with preliminary evidence. We find that firm with RC has lower audit
committee meeting frequencies and reduces audit fees.
(5) Alternative measures of financial reporting quality
Empirical research evidence that the measures of financial reporting qualities are not static.
We use performance adjusted discretionary accruals as a preliminary measure of financial
reporting quality. In this section, we will conduct an additional test to check the robustness of
financial reporting quality. Revenue is the largest earnings component of most companies. It
is highly subject to discretion (Stuben, 2010, p. 696) and is the most common type of
misstatement (Turner et al., 2001). To calculate the second proxy, we follow McNichols and
Stubben (2008) and Stubben (2010) and estimate discretionary revenues. Specifically, we use
the following regression:
ΔARi;t ¼ m0 þ m1 ΔREVi;t þ εi;t

where ΔARi,t represents the annual change in accounts receivable and μ1ΔREVi,t is the annual
change in revenues, each scaled by lagged total assets. Discretionary revenues are the residuals
ARA of the equation, which is estimated separately for each industry-country group that has at least
five observations. We multiply the absolute values of discretionary revenues by 1(DisRev).
Thus, higher values of DisRev represent higher FRQ. We rerun equation (1) to test whether our
findings are robust using alternative measures of financial reporting quality. The association
between RISKDUM and DisRe is negative (coefficient 0.020, t-statistic 5 1.99) and
statistically significant at 5% level. Our results (results are not reported for the sake of brevity)
suggest that the preliminary findings are materially unchanged.

5. Conclusions
This research aimed to empirically examine the effect of an RC on the quality of financial
reporting. Discretionary accruals were used as a measure of financial reporting quality.
Further, the study examined whether the existence of RCs effects on audit pricing. Based on
the study’s findings, it can be argued that the presence of an RC absorbed a firm’s business
risk and this facilitated enhanced financial reporting practices and, thus, the auditor
acknowledged the role of the RC in reducing the audit price. Consistent with the study’s
propositions, the findings indicated that the existence of an RC improved the quality of
financial reporting by reducing discretionary accruals. Furthermore, the study confirmed
that the presence of an RC in a firm served as a risk-mitigating tool and audit pricing
responded favourably in comparison to firms that did not have an RC operational.
This study will help regulators, policymakers, and professionals to understand the
importance of risk management as we found that the existence of an RC induced lower
discretionary accruals, indicating better financial reporting practices. Finally, the findings
of this research will reinforce the establishment of an RC as a mechanism for risk
management. Most academic research in this area has focussed on the determinants of RC but
this research was innovative as it examined the beneficial consequences of the existence
of RCs.
Also, the findings of this study would be useful to current and prospective investors as well
as to regulatory authorities responsible for monitoring managerial, financial reporting quality.
These findings would also be beneficial to the regulatory authority responsible for implementing
better CG compliance, as implementing an RC functions as a risk-mitigating tool in the
investment decision-making the process. Our findings evidence that the existence of an RC is
beneficial but that does not outweigh the benefit of the audit committee. We offer future research
to examine the cost of operating the RC and evaluating the market impact of forming RCs.

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Corresponding author
Md. Borhan Uddin Bhuiyan can be contacted at: m.b.u.bhuiyan@massey.ac.nz

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