Does the Audit Committee Enhance Reliability and Value Relevance of Accounting Earnings?

This paper investigates the effect of adoption of audit committee on the information usefulness and value-relevance of accounting earnings. It analyzes discretionary accruals, earnings-return multiples and earnings-price multiples to see if there are differences between adopters and non-adopters and between pre-adoption and post-adoption period. Empirical results show that 1) adopters' discretionary accruals are lower than those of non-adopters indicating the audit committee has enhanced the reliability of accounting earnings, 2) the adopters reveal greater earnings-return multiple in return-earnings model, and 3) the adopters' earnings-price multiple in the Ohlson model is greater than that of non-adopters. 2) and 3) indicate that the introduction of audit committees has improved information usefulness and value-relevance of accounting earnings. We had essentially the same results for the analysis comparing the pre-adoption with the post-adoption periods for all the adopters. This paper documents that the audit committee enhances the reliability and value-relevance of earnings, and shows that the contradicting evidence of the previous studies with the Korean samples results from differences in sample period.