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The Association between Audit Commmittee Characteristics, the Contracting Process and Fraudulent Financial Reporting
Lisa A. Owens - Jackson, Clemson University
Diana Robinson, North Carolina A & T State University
Sandra Waller Shelton, DePaul University
ABSTRACT. The Sarbanes-Oxley Act of 2002 mandates that audit committees be fully independent and have at least one financial expert. This paper contributes to the literature on the association between audit committee characteristics recommended by SOX and the likelihood of fraud in two ways. First, we focus on audit committee composition and the extent of the underlying nature of the firm and the contracting environment on the likelihood of fraud. Second, we examine firms with totally independent audit committees and fraudulent financial reporting. We find that the likelihood of fraudulent financial reporting is negatively related to audit committee independence, number of audit committee meetings and managerial ownership and positively related to firm size and firm growth opportunities. We find that the likelihood of fraudulent financial reporting given a totally independent audit committee is inversely related to the level of managerial ownership and the number of audit committee meetings.
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