Audit committee size and financial reporting quality

Abstract

This paper explores the relationship between audit committee size and financial reporting quality in China. The empirical study uses a sample of 829 Chinese listed companies and 1822 year-observations from the period of 2015-2017. Panel regression is conducted to test the hypothesis, and it finds that the large size of the audit committee has a negative and significant relationship with the quality of financial reports. Although the normal belief is corporate governance can facilitate the resource allocation and efficiency of decision-making, the result of the study suggests that there is a need for companies not to have too big audit committee as it may cause problems of increasing number of free-riders as well as delayed decisions, which results in a low financial reporting quality. As a new practice in China, audit committee formation is not mature enough for it to function effectively.