Audit committee characteristics and earlier voluntary ethics disclosure among fraud and no-fraud firms

This paper empirically examines specific characteristics of an audit committee that could be associated with the likelihood of earlier voluntary ethics disclosure. The sample includes firms that were investigated by the Securities Exchange Commission for fraudulent financial reporting before the Sarbanes-Oxley Act's ethics rule became effective, and their matched no-fraud firms. This study finds that the level of voluntary ethics disclosure was very low compared to the current mandatory disclosure. Results based on a logit regression analysis suggest that firms which made earlier voluntary ethics disclosure were likely to have a larger and more independent audit committee that met more often, and were less likely to engage in fraudulent financial reporting. These results should help policy-makers, investors and boards of directors focus on these audit committee characteristics, which could be crucial not only to ethics disclosure, but also to the ethical conduct of a firm. In particular, results regarding size and meeting frequency highlight how to further improve the effectiveness of an audit committee and the quality of an ethics code not only in the United States, but also in other countries. These characteristics may also indicate a firm's propensity to make any voluntary disclosures, and may help to explain the differential quality of current mandatory ethics codes in the United States. Additionally, these results should be useful to global investors who desire to use corporate governance criteria for screening stock investments in countries where there are no ethics-code requirements. © 2009 Palgrave Macmillan.