Do audit committees manage legitimacy through increased voluntary reporting? Evidence from a large-scale textual analysis of audit committee reports

This study investigates whether audit committees manage legitimacy by voluntarily disclosing their financial reporting and audit oversight activities in the audit committee report. The answer is important because, if true, it would suggest that a regulatory mandate to require expanded audit committee reports may not be necessary. Performing a large-scale textual analysis of over 24,000 U.S. companies’ audit committee report disclosures issued between 2006 and 2017, we find that audit committees of large accelerated filers (LAFs) voluntarily increase disclosure of their financial reporting and audit oversight activities following (1) the SEC’s 2015 Concept Release which encouraged greater audit committee disclosure and (2) a company’s announced need to restate its financial statements. However, we do not find a similar increase following either event for non-large accelerated filers. Our findings indicate that large companies respond to external demand for additional audit committee disclosure but that a regulatory mandate may improve small company audit committee reporting.