The effect of audit committee characteristics on the audit reports designed by the new auditing standard.

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The effect of audit committee characteristics on the audit reports

designed by the new auditing standard.

Name: Daniël.D.Wijnja

Primary supervisor: Prof. Dr. D.A. De Waard RA

Study: Master Accountancy

Co-assessor:

University: Rijksuniversiteit Groningen

Words: 7932

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“Although a full degree of certainty can never be issued in accountancy,

writing the master`s thesis is an exception to this”

I would like to thank my supervisor professor De Waard RA for supporting through lectures, giving feedback, and the overall collaboration. Moreover I woud like to thank EY Groningen for giving me the opportunity to do an internship.

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Abstract

By obliging key audit matters as a part of the new longform auditor`s report, key audit matters become increasingly interesting for research. In this study the relation between gender diversity in the audit committee and the amount of key audit matters is investigated. In addition, it has been investigated whether gender diversity in the audit committee affects the number of key audit matters. For both possible relationships it has been investigated whether the phase in career in which the audit committee members are, expressed as tenure, has a moderating effect. A sample of 294 observations is used for this study. All firms in the sample are stock listed on the AEX (Amsterdam Exchange Index), FTSE 100 and FTSE 250 (London Stock Exchange). Unless the surprising outcomes of this study, it cannot be said that one of the suspected relationships has been proven with statically significant evidence.

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1 Introduction.

1.1 Introduction

Already in 2014, the Minister of Finance Mr. Dijsselbloem, complained about the quality of audit reports published by the big 4 accountancy firms (Rijksoverheid.nl). His opinion was based on critical findings of the Dutch oversight board Autoriteit Financiële Markten (AFM), which stated that the report of the independent auditor of big 4 accountant firms was structural below par. Dijsselbloem forced the branch to come up with additional rules and regulation, to improve the quality of their audit reports and to restore the confidence of the society in the accountants. A relation of trust which has been damaged by several misconducts according to Mr. Henk Nijboer (PvdA) member of the Dutch parliament (pvda.nl).

On December the 19e, the Nederlandse Beroepsorganisatie Accountants (NBA) introduced new rules for the audit report which has been applied since the first of January 2017. The rules apply to Organistaties niet van Openbaar Belang (niet-OOB`s). The rules for Organisaties van Openbaar belang (OOB`s) has already been introduced. Main issues of the new auditing standards are explicit naming of key audit matters and applied materiality. Components which has have been made compulsory in the United Kingdom already.

Because of this newly introduced legislation, the amount of disclosure should have been increased. In this paper will be researched investigated whether the new legislation indeed has an increased effect on the amount of disclosure. Because of the wide range of components effecting the amount of disclosure which cannot be covered within one single research, this paper will especially focus on a particular subtopic with a likelyan expected impact, namely the audit committee. However because an audit committee itself has several characteristics too (Othman et al, 2014; and Meyer, 1987), we focus on one specific audit committee characteristic as subject of research, videlicet: the gender diversity in the audit committee. This is a feature of the audit committee which has influence on the quality of the reporting process of the firm (Ittonen et al. 2011) and perhaps on the quantity too, but however this will ill be investigate further in this study.

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1.2 Problem statement

In this paper, the characteristic gender diversity in the audit committee has been studied to investigate whether the amount of disclosure, conforming the rules of De Nieuwe Controleverklaring, is influenced by this committee characteristic. Moreover, we take into consideration the effect of gender diversity in the audit committee on the amount of key audit matters mentioned. Lastly, it will be investigated whether audit committee tenure has a moderating effect on the relations mentioned above.

The setting in which this research has been executed is the Netherlands and The United Kingdom, because these countries are precursors when it is about implementing this new auditor`s report. The sample consists of 296 stock listed firms (238 UK and 58 dutch), which all contain an audit committee with a certain extent of gender diversity and tenure. The main theory on which this research is based on is the agency theory (Jensen and Meckling, 1976) and the cultural

dimensions theory of Geert Hofstede (Hofstede, 2001). Those will be explained thoroughly in the theory section.

1.3 Relevance

Although there is extensive literature about the influence of several managerial characteristics on the conduct of managers e.g. (Strong and Meyer, 1987; Elliott and Shaw, 1988; DeAngelo, 1988; Pourciau, 1993), research in the field of audit committee characteristics on committees

performances is limited. Filling this gap in the literature is important taking into consideration the influence of an audit committee. However after launching of the new auditing standards, this lack is even more crucial since theis has increased theing influences of this committee on the final auditors statement. The process by which this influence is assigned will be explained in more detail in the section `audit committee`.

After launching the new auditing standards, the importance of research to audit committee influencing factors has become even larger, due to another fact namely the implementation ofintroduction of a new mandatory item: the key audit matters. Those key audit matters are, in comparison to earlier regulation, the most important change in the longform auditor`s report ` is

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the inclusion of key audit matters( Bos & Strating, 2014). The key audit matters are, according the accountant (2014), the most important issues during the audit of the annual report and those issues will be relevant with regard to the information value for the intended users (NBA, 2014). The accountant describes in this part of the auditor`s report the main points discussed during the audit and he argues why he thinks this is of such an importance. Moreover the accountant reports which control activities has been executed and, if relevant, his comments. Key audit audit matters contain a high information value because they are specific for every organization.

Because of the introduction of those important key audit matters which can be influenced by the audit committee, the audit committee gets another extra task which further increases its influence on the audit report and the shareholders view of the organization.

Prior research, mainly focused on CEO`s and board of directors, found significant result for the characteristics tenure and gender diversity in relation their course of action (Ali and Zhang, 2015; Borghesi, Chang and Mehran, 2016). Relying on those researchesstudies, this papers assumes those characteristics as relevant too concerning the actions of the audit committee to.

Notwithstanding the fact that all workers in the firm should strive to the same business objective which is aligned with the organization strategy, a one-on-one comparisons among CEO`s, board of directors and audit committees cannot be made, due different mutual in duties concerning acting on behalf of the shareholders. Weaknesses within this comparison can may lead to a deviating extent of significance and will be explained more thoroughly in the discussion part of this paper.

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2 Literature review

In this literature review, the main subject of this paper: The longform auditor`s report will be explained. The main differences between the new edition and the prior one will be mentioned because they are subject of research. After

make making clear those differences, the relations assumed in this paper will be justified by scientific literature using the agency theory, the stakeholders theory and the cultural dimensions framework.

2.1 The Longform auditor`s report

In this part of the literature review, the longform auditor`s report will be explained. There will be attention for the main characteristics of this report and the main differences in competence to the prior edition will be mentioned.

Since 2014, Organizations of public interest (Organisaties van Openbaar belang, OOB`s) are since 2014 required to provide an extended version of the regular auditor`s report, called thede auditor`s report (nieuwe controleverklaring).

required to give more information about the control environment of the audited firm audited and he should pay more attention to which approach chosen in the auditthe accountant has taken this new approach concerns the inclusion of key audit matters. The key audit matters are the most important points discussed by the accountant with the firm`s board and audit committee (if present). Certain points may be the problems faced during the audit. Moreover, key audit matters can contain circumstances which have led to changes in the process of control. By the addition of certain key audit matters is being attempted to include more firm specific information in the auditor`s report (NBA, 2014). Due to the addition of this firm specific information, the longform auditor`s report differs significantly from the previous version. The auditor`s report from before 2014 mainly contained standardized text which is the same for each company. By using standardized texts, auditor`s report might be missing particular important information which makes it harder to picture a specified view of the firm. Especially when accounting estimates, i.e. impairment on goodwill, make a significant contribution to the reporting (NBA, 2014). The chosen approach will be explained in the subject `key audit matters` which is a new added chapter complementing the regular auditor`s report. Those key audit matters are firm specific which distinguishes the prior auditor`s report, which only consists of the standard text which is the same for each company in every industry. In times of a standard auditor`s report, particular important information lacked and the firm failed in providing a specified view of the firm. especially when it was about accounting estimates e.a. impairment on goodwill which is pretty subjective (NBA, 2014).

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The auditor`s report has great social importancevalue, because in this document the accountant whether the annual report gives a fair view according to Gay & Schellug (2013). In the society, among shartakeholders and , politicians and even the accountants branch was a call for a more of this extensive auditor`s report (NBA, 2014). Partly due to the financial crisis, the interest of go beyond just the conclusion drawn by the accountant.They wanted more underlying and specific information to base decisions. by demands for information aboutkey audit matters and distinguishing itself from the prior previous edition by six main differences (NBA, 2014):

- The auditor`s report starts with the accountants judgment.

The auditor`s report will be more structured and starts with the most important part: the auditors opinion.

- Key audit matters will be added.

In this completely new part, the auditor describes the issues which were most important in his opinion and which will be important for the intended user. In this part of the auditor`s report, the most important risk will be described and the auditor will explain why this issues are critical. Moreover the auditor defines which control activities have been taken. These key audit matters have a high information value because they are specific for the firm audited.

- Continuity of the firm audited.

The new auditor`s report contains additional comments about the responsibilities and activities of the auditor concerning the going concern assumption. Furthermore the auditor explains the responsibilities and activities of the management concerning the going concern assumption. If necessary the auditor pays special attention to issues which can influence the firm`s continuity.

- Materiality.

The intended users of the annual report can be misled when the annual report does not show a fair view. When a mistake affects the user in such a way that he is changes his decision, the mistake is called `material`. The auditor should take into account both quantitative and qualitative

materiality. He should report the materiality and the way it is decided.

Quantitative materiality means the amount of materiality that can be calculated based on the typology, equity percentages, balance sheet total, net turnover or a combination of these.

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The qualitative aspects relate to a company's deviating risk profile, which may mean that the percentages used may be adjusted downwards (Accountant, 2014).

- Scope of group control.

In the scope of group control part, the auditor explains how he has examined the control procedures of various group components. He will explain which group components are audited by himself and for which group components he has used information provided by locally based auditors of the particular group component has used. Last but not least the auditor will declare which other activities he has carried out.

- Attention for readability

A point of criticism in the previous edition of the auditor`s report was the large amount of standard texts, which are less relevant and more difficult to understand for the intended user. In the new version of the auditor`s report, the texts will be expressed more claryclearer referring in some respects sometimes with reference to the NBA-website which contains further explanations whereby additional ambiguity is preventedso a lack of clarity will be prevented.

Provides a greater amount of more specific information than previous editions, creating a better basis for decisions by intended usersThe new auditor`s report, as explained above, generates much more information than previous editions. This requires good coordination between management, board of directors and the audit committee (NBA, 2014). The information in the auditor`s report namely, should correspondent with the information which the auditor provided to the managers and board of directors (NBA, 2014). The other way round, the managers and board of directors should consider the subjects mentioned by the auditor for their reporting (NBA, 2014).

In the same period of implementing the new auditor`s report, the Financial Reporting Council (FRC) has tighten the rules for managers and board of directors. The rules stipulate the audit committee is required to incorporate the key audit matters mentioned by the accountant in its annual report (FRC, 2012). To avoid inconsistency between the auditors key audit matters and the

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firm specific information published by the audit committee, a good coordination between audit committee and accountant is required (FRC, 2012).

In this part the one of the main theory on which this paper is based: The Agency Theory, will be explained. Thereafter in extension the stakeholder theory will be explained and finally the use of these theories for this research will be justified.

2.2.1 Shareholders

The audit committee created legal derive from the agency theory (Jensen and Meckling, 1976). The theory distinguishes two roles: an agent and a principal. In the original version of Jensen and Meckling from 1976 is the principal the shareholders who is dependent on the executive manager who plays the role of agent. The agency theory offers prevention for two negative consequences due to information asymmetry, namely moral hazard and adverse selection (Scott, 2014). Moral hazard is the problem of pursuing self-interest by managers (Scott, 2014). Despite the fact that shareholders (principals) have their share in financing the firm, they do not determine the strategy and operational decisions. The right of disposal lies with the executive managers (agents) who, in turn, should defend the benefits of the shareholders. However sometimes the interests of the managers and shareholders defer, whereby managers can have certain incentives to pursue self-interestwhich can be an incentive for the managers to act in their own interest. This can be strengthened by information asymmetry which makes improper conduct of managers less traceable (Jensen and Meckling, 1976).

Although managers do not always deal on behalf of the stakeholders, this is not always clearly perceptiblenoticeable. Managers namely can decide to what extent they are willing to release information. By being selective in the release of information, managers can create a false impression. This problem of selective information release which impedes the verification of managers behavior is called adverse selection (Scott, 2014).

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2.2.2

Stakeholders

Beside fact that firms derive legitimacy due to reporting on behalf of the shareholders, as described above by the agency theory, there are many more parties to be informed by accurate financial and non-financial information as Kaler (2006) sets out on the basis of the stakeholder theory. The stakeholders theory sets out that there are, besides shareholders, more groups of interest interacting with the firm. These groups should also be informed with reliable and useful information as the theory has originally be design by Freeman (1994).

The past has shown that such untraceable behavior can lead accounting scandals ea. Enron, Worldcom and Ahold in respectively 2001, 2002 and 2003. To prevent such scandals and increase the degree of confidence the stakeholders will hold in the reported financial statements, the audit committee is established as a monitoring body to decrease information asymmetry as incentive for managers to behave in their own benefit (Cai, Hillier, Tian & Wu, 2015). It is not only the audit committee which derives it existences from this verification problem, also the accountants profession finds its basis in here. The audit profession has also been created to carry out audits to protect the users of the financial information from the disadvantages of information asymmetry as Watts and Zimmerman (1983) explain in their research.

The accountants job is created to decrease the conflict of interest, by executing audits to as an independent third party (Watts and Zimmerman, 1983).

2.2.3 Applying theories to research framework

The agency theory and stakeholder theory are therefore chosen in this research paper, because the standard situations as it is described by Jensen and Meckling (1976) and Feeman (1994) is transportable to the situation investigated in this paper. The situation of information asymmetry between board of directors and their stakeholders, which should be minimized by deploying a third party. The board of directors have different motivation for disclosing or not disclosing particular data (Dobler, 2008). According to Dobler (2008), board do not want to disclose to many information because they will lose the advantages which can be earned when they benefit

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from inside information. On the other hand, stakeholders want to receive as much information as possible about the firm to form a credible picture of the firm and refine their future prospects (Dobler, 2008). By providing insufficient information by the managers to the shareholders, the shareholders are not able to analyze the state in which the firm is located (Scott, 2014). This state of uncertainty will make shareholders ask for a compensation for the risks they run according to Scott (2014). This compensation, in the form of a demand in higher interest rates, is an incentive for managers to disclose information to please the shareholders and control the costs of equity conforming to Scott (2014).

Although disclosure can reduce excessive demands of compensation by shareholders, the information disclosed is should not necessarily be right. Managers can disclose unfair or manipulated information to influence shareholders with the intention avoid the disadvantages of non-disclosure. To prevent this problem the agency theory, as already mentioned, calls for the appointment of a more objective party which monitors the management. So by implementing an audit committee followed by an audit of the annual report by an accountant, the shareholders are to a larger extent assured of reliable and truthful information which reduces the moral hazard and adverse selection problems and moreover results in lower agency costs (Klein, 1998). This advantage may be expanded by the adoption of De Nieuwe Controleverklaringthe longform auditor`s report in which more information is requested, which can lead to less information asymmetry and therefore less adverse selection and moral hazard.

For this paper a particular monitoring committee is subject of research, namely the audit committee. The audit committee, as more fully described in the chapter Audit Committee, is a monitoring body within the firm, which is in direct contact with the extern (and intern)

accountants. In addition, the audit committee assesses the internal control process and the control activities of the firm and reports to the board of directors (DeZoort, 1997).

So the Agency theory (mainly) and stakeholder theory (secondary) has been used in this study because explains the underlying reason why firms disclose control information

2.3 Gender diversity

The second main theory on which this paper is based: Hofstede`s cultural dimensions we`ll be explained in this theoretical part. Moreover the most relevant part of this theory, differences between masculinity and femininity will be highlighted and additionally supported by the theory of feminine ethics. Last but not least the theory will be linked to this research.

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Now we know the reason of existence of the audit committee, we can look further in a theoretical perspective to investigate some characteristics of the audit committee. This perspective is based on the cultural dimensions distinguished by Geert Hofdstede (2001) at country level. Hofstede categorizes cultures into five dimensions:

- Power distance

- Individualism vs. Collectivism - Masculinity vs. Femininity - Uncertainty avoidance

- Long term vs. Short term oriented

In this paper we take into consideration the third dimension Masculinity vs. Femininity. The masculinity part represents characteristics materialism, performance driven and egoism in contrast to femininity which stands for solidarity, quality of life and fair distribution of benefits in the light of Hofstede (2001). Although in his dimension scheme he talked about complete cultures at country level, this paper transfers the mentioned characteristics to firm level. Hofstede named the collection characteristics namely after men and female because those characteristics are more or less gender specific, which may well be linked to this particular study whereby the differences between male and female is partially subject of research.

The statement of Hofstede in his publication that female are more focused on all stakeholders and make decision on behalf of the groups benefit in contrast to the more selfishness men, is being supported by research of Gilligan (1982). As professor in the psychology, he suggests the idea of feminine ethics. Feminine ethics is the idea that in decision processes, women are taking into consideration elements related care and collective welfare, whereas men more tend to egoism (Gilligan, 1982).

In addition to the above study, it is widely acknowledged in the psychological and managerial literature that gender differences exist e.g. in cognitive functioning, communicative skills, decision- making, and leadership style (Itonnen et al, 2010). Considerable evidence for example assumes that women have better communicative capabilities, which insure suggests that they are generally better than men when it is about tasks which concern whereinconcerning the

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explained by is required (Wood et al, (1985). Because of the better communicating and more listening skills, they perform better than men on group problem solving and decision making tasks which require discussion and consensus (Wood et al, 1985). Hofstede`s (2001) his statement about the altruistic characteristic of women is also confirmed by research of Fondas and Sassalos (2000), in their research they argue that women tend to have higher expectations regarding their responsibilities in influential positions, which may induce them to expend more effort on their tasks. Moreover women seems to prepare better for council meetings than men, which increases the effectiveness of meetings (Huse and Solberg, 2006). Taking into

consideration those research results, we may assume a positive relation between the amount of female in the audit committee, on the comprehensiveness of reporting and the amount of key audit matters mentioned.

On the other hand, an audit committee completely consisting of women however canmay also bring disadvantages. A lack of heterogeneity in a group can lead to a decrease in creativity which is necessary for reacting suitable in different situates according to Erhardt et al. (2003).

Moreover, according to Crane and Matten (2010), women more widely discuss certain topics and take into consideration a wide range of opinions, while men are more straightforward when making decisions, serving a smaller group of stakeholders in a more efficient way.

So literature endorses once again the importance of board diversity. Especially in times of changes, board diversity facilitates reaction on changes in a flexible way as reported by Erhardt et al. (2003). Their statement is particular interesting for this research, because a change in reporting is subject of research.

There are several definitions for gender diversity in literature for example the number of men/female in de board (Tinsley et al, 2017). In this paper we use the female ratio in the audit committee.

2.4 The audit Committee

The audit committee primary oversees the firm's financial reporting process. The committee represents the best place for directors to discuss any financial reporting problems, to identify

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solutions and to undertake corrective actions (Menon and Williams, 1994) The committee meets regularly with the firm's external auditors and internal financial managers to review the corporation's financial statements, audit process, and internal accounting controls (Klein, 2002). By making use of an audit committee, particular lacks in the reporting process can be discovered., although In extension thereof, the extent chance of detecting and recovering those lacks by an audit committee can be influenced by characteristics of this monitoring body for example the amount of board meetings (Allegrini and Greco, 2013)

One of the most important requirements of the audit committee is the independency, so the members are capable to make objective decisions on behalf of the shareholders (Chan and Li, 2008) Independent auditors are particularly able to make objective decisions. This independency of the executive board does not only improve the objectivity of decisions, but it is also positive related to the firm value (Chan and Li, 2008). When audit committee members can act independent from the executives, they can decide more objective as Chan and Li (2008) mentioned, which leads to less manipulated reporting and provides shareholders a more realistic view of the current state of the firm. In other words, a better representation of reality leads to less information asymmetry between executives and shareholders which has a positive consequences for the cost of capital and by extension the firms profit (Linsley and Shrives, 2000).

2.5 Audit Committee tenure.

Moderating variable in this research is the career stage inat which the members of the audit committee are. According to prior research from Ali and Zhang (2015), the phase in which audit committee members are can have a significant influence on the way they approach their jobs. Committee members in earlier states of their careers are more behaving in favour of those particular careers, which makes them strive for well appreciated results as Ali and Zhang (2015) mentioned in their research paper. This highly motivated course of action deployed to accelerate their careers, is translated to this research by measuring the effect of the career stage on the amount of key audit matters mentioned and the amount of reporting in general. If audit committee members are really more motivated in earlier stages of their careers, an effect on the two

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However not all prior studies are unanimous when it is about the influence of career stage on the willingness to perform well. Francis et al. (2008) for example state that reputed older committee members, which are thus in a later stage of their career, are highly motivated to perform in the way which is demanded in order to continue as an excellent performing committee member. The reputation which they have been built up over the years, works as an incentive to performprevent loosing this reputation well to not lose this reputation (Francis et al. 2008).

However, according to research from Graham et al. (2005), the argument put forward by Ali and Zhang (2015) about the incentive for performing outstanding on behalf of one`s career is attached with an even more significant outcome. All in all, there are several studies making it plausible to assume a moderating effect created by the state in which an audit committee member is located, called audit committee tenure in this study, and the assumed relation between the independent variable (gender diversity in the audit committee) and the dependent variables (amount of key audit matters mentioned & amount of audit disclosure). Because of the substantial arguments for both ways of reasoning, the direction of the assumed moderating variable (positive or negative) is not yet determined.

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3 Hypothesis

According to the theory specified in the theoretical part, a strong suspicion exists that a

combination of the characteristics typical for both the sexes combined within one governing body has influence on the reporting of this particular body. Supported by the study of Gilligan (1982) about feminine ethics, the following hypothesises are formulated:

H1: Gender diversity has a positive influence on the amount of key audit matters mentioned in the

auditor`s report. (fig 1.)

H2: Gender diversity has a positive influence on the amount of disclosure in the auditor`s report. (fig 1.)

Although there haves been done performed several studies on the influence of career stage on the way of reasoning of governance committee members an in the extension thereof their

performance, a corresponding answer has is still not been formulated. Because of the significant results in both directions, we expect that the career stage of the audit committee members exercises influence on the relation assumed between our independent variable and our dependent

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variables. However the direction is therefore not yet determined direction of this moderating hypothesis relating to the moderating variable:

H3: Audit committee tenure has (positive/negative) influence on the relation between gender diversity and the amount of key audit matters mentioned and the amount of audit disclosure. (fig 1.)

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4 Methodology

In this method section, the execution of the statistical analyses will be explained and validity will be justified. At first the sample and variables will be concretized, thereafter the statistical tests chosen will be clarified and lastly the robustness will be justified.

4.1 Sampling and variables.

The data used for this study is archival data from a carefully collected database provided by the University of Groningen. The database is supplemented with the information about the age of the audit committee members for the moderating variable audit committee tenure. This addition data is provided by Bloomberg.com, a database for financial and managerial data. The sample used exists of 294 observations of firms from The United Kingdom and The Netherlands. This because these countries as already mentioned are prosecutors when it is about implementing the new control standards. For the independent and dependent variables, the data used is from 2013 up to and including 2015. The moderating variable is, in order to keep this research within an acceptable workload, limited to 2013. The British part of the sample is composed of the FTSE 100 and FTSE 250 (Financial Times Stock Exchange Index), which together represent the 350 largest stock funds in the UK. After filtering out the funds which do report all the required characteristics, a same of 294 observations provided relevant information to build on statistical tests. The particular database has been provided by the RUG (Rijksuniversiteit Grongingen) and is especially available for academic proposes related to this university.

4.2 Independent variable.

Gender diversity (GenDiv) - The independent variable gender diversity in the board will be

expressed by the female ratio of the audit committee. The closer this ratio is to 0,5 the more diversified is the audit committee`s composition. Expressing the diversity by a female ratio is derived from prior research by Cheng et al. (2016). Although a male ratio, in fact, does not make any difference for the final outcome, in this paper a female ratio is used because of the emphasis on a particular on women inspired form of ethics namely feminine ethics by Gillian (1982).

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4.3 Dependent variables.

4.3.1 Amount of disclosure (Words)

The first dependent variable, amount of audit disclosure (Words, is a research specific created construct which expresses the amount of disclosure by the number of words used in the audit report. As already mentioned in the literature part, we expect a more diversified audit committee to report more because of the significant part of female participating. Moreover, a diversified audit committee also contains male members which is advantageous because, we assume based on prior literature that a lack in heterogeneity can lead to less creativity and worse audit quality according to research of Erhardt et al. (2003)

4.3.2 Key audit matters (KAM)

The second dependent variable, key audit matters (KAM), will consist of the total amount of key audit matters which are reported by the particular stock funds. As mentioned in the literature part, we expect a higher quality of audit reports when the audit committee is diversified. Naming several key audit matters by the audited party, could indicate more objectivism within the audit committee because of the vulnerable position taken by naming various critical points. This is in accordance with research of Francis et al. (2013) in which is stated that audit quality is observable when a firm reports also about adverse situations or the probability of occurrence.

4.4 Moderating variable

4.4.1 Tenure

The moderator audit committee tenure, in short tenure, will be expressed by the age of the particular committee members rounded to whole years. Although tenure generally expressed the duration of participating a particular body, in this research paper, tenure expressed the career state in which the audit committee member is located currently. This because tenure is common measure in accounting literature (Zheng, 2015), however in this paper it can be read as state in the career. (see. Limitations chap. 6)

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4.5 Control variables

4.5.1 Firm Size (Size)

The first control variable which will be taken in account is firm size. As every story has two sides, the influence of firm size can be explained in two contrasting explanations. On the one hand, it could be said that larger companies include more activities and therefore face a larger amount of key audit matters as a result of their more complex structure (Aldamen, 2012). On the other hand, larger companies have generally a larger amount of financial resources whereby it can spend more specialized attention to the control system and the process of financial reporting which results in a smaller amount of key audit matters (Aldamen, 2012). Following Aldamen`s (2012) research, we control for the decreasing influence on the amount of key audit matters due to firm size, whereby firm size (Size), will be expressed as the logarithm of the total assets the same as in case of Aldamen (2012).

4.5.2 Amount of audit committee members (ACmembers)

The amount of members participating in the audit committee may have impact on the amount of key audit matters reported (Andersen et al. 2012). As stated in the study of Anders0n et al. (2004), larger companies will probably report less key audit matters because of higher level of reporting quality. This high quality is due to the larger amount of resources which, as already mentioned, can lead to deploying more specialized workforces and more members in the audit quality. As Rahmat et al. (2009) well formulated in brief, larger audit committees generally have more financial an intellectual resources which results in a higher level of monitoring. The amount of audit committee members will be expressed in the absolute amount of members.

4.6 Statistical tests.

Because we assume, grounded on prior literate, a relation between gender diversity in audit committees and the amount of key audit matters and reporting in general, we want to test those variables using a multiple linear regression resulting is this formula.

Words = β0 + β1 * GenDiv + β2 * Tenure + β3 * Size + β4 * ACmembers + εi KAM = β0 + β1 * GenDiv + β2 * Tenure + β3 * Size + β4 * ACmembers + εi β0 = constant coefficient

βi = slope εi = error

To reduce the effect of outliers in the independent variable firm size, we use the technique of winsorizing. All extreme deviations which differ more than two standard deviations of the mean, will be treated as data differing no more than two standard deviations. Moreover the use of logarithm also reduces the outliers, but still preserves the big picture.

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4.7 Multicollinearity

It should not only the control variables to get a clear view of the relations assumed. To get a true picture, there should also be tested for relations between all the variables within the model. This is called multicollinearity, which can have influence on the reliability of the analysis. If the variables are interrelated, they can influence the relation assumed as it is formulated in the hypothesis. In this study we use the criteria for multicollinearity as stated by Blumberg, Cooper & Schindler (2014) whereby a correlation coefficient below -0.8 and above 0.8 indicates multicollinearity.

4.8 Robustness.

By using variables which have already been constructed in prior research, except Words, the reliability of the research will be increased. It improves the reliability because a successful methodology of prior research will be repeated which already has proved its value. On top of that, the use of multi-year data, gender diversity measured over 2013 up to and including 2015, increases the reliability because it shows that it is not a snapshot taken. Last but not least, the checks for control variables and multicollinearity increase the reliability by testing for influences which can distort conclusion taken with respect toregarding the hypothesis. However use of the new created construct has a negative influence on the reliability because it is not derived from earlier successful research. Conversely the new created construct has the ability to improve the validity of the statistical analyses because it is created especially for this research, while the other variables are one on one taken over from prior research.

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5 Results

In this results section, the main outcomes of the statistical tests applied will be explained. Although the application of the statistical tests planned provided a significant amount of information, only the relevant outcomes will be explained which are remarkably all insignificant. For both the dependent variables, key audit matters and amount of reporting, the statistical regression has been applied. Thereafter the moderator has been added to investigate whether this variable has any impact on the whole.

Key Audit Matters.

As figure 2 shows, the beta referring to the relation between gender diversity and amount of key audit matters is negative (B=-0,09) which means a negative association between the degree of gender diversity in a firm and the amount of key audit matters reported. In other words, a more diversified audit committee could be associated with a smaller amount of key audit matters reported by the accountant in the longform auditor`s report of the particular firm. However, in this case the standard error (SE=0,10) is insignificant. Despite the fact that a small negative association is visible between both variables, it cannot be assumed with a 95% degree of confidence. For the first hypothesis drawn up, we cannot accept H1 and have to reject it by saying that there is no statistical evidence found to assume a positive assumption between gender diversity in the audit committee and the amount of KAM. Even more noticeable is the fact the statistical outcome tends more to a negative association between diversity and KAM, than a positive association. Based on the theories explained in the literature review, we would expect a positive assumption between both variables. Whether the outcomes concerning the first

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hypothesis were statistically significant or not was the main question and subject of research, but an opposite association as the table (fig 2) shows is something completely unexpected. In the discussion part, more attention will be paid on it.

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5.1 Amount of disclosure.

Figure 3.

The beta belonging to the relation between the gender diversity and the amount of reporting (B=26,02) is unlike the prior relation in the same direction as we expected. Although the statistical analysis shows a positive association between both variables, the standard error shows no significance (SE=77,18). There is a presumption that an increased level of gender diversity within an audit committee leads to more extensive reporting, however we cannot guarantee this with a 95 percent level of confidence. So if the second hypothesis was formulated conversely, it would be closer to the truth but still not significant. All in all, the second hypothesis as

formulated in the hypothesis part cannot be accepted and therefore H1 should be rejected. There is no statistical evidence to assume that a more diversified firm will lead to more comprehensive reporting.

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5.2 Tenure

Based on scientific literature, the impact of the age of audit committee members on the dependent variables in the constructed model was expected to be positive. However, the outcomes of the statistical analysis show the opposite. The betas of the moderator on the relation between gender diversity on number of key audit matters and the amount of words are respectively (B=-116,77) fig.2 and (B=-0,08) fig. 3. This indicates that the age of audit committee members rather has a decreasing influence on the amount of key audit matters and comprehensiveness of the longform auditor`s report in general. However, as with all suspected relations there is no significance from the analysis. We cannot state with a reasonable level of certainty that such a negative relation exists. What definitely can be argued is that the moderator at least not influences the relation between the independent variable (GenDiv) and the dependent variables (Words and KAM).

5.3 Multicollinearity

As described by Blumberg, Cooper and Schindler (2014) multicollinearity is the phenomenon which involves several variables which independently interact with each other. If autonomous variables interact outside a statistical model, they will probably overlap partially. Overlapping variables can influence the regression model because they represent the same datae by degrees, which lowers the confidentiality of the statistical model and its outcomes. To test for this multicollinearity, the Pearson correlation coefficient test has been performed. As criteria for multicolliniearity in this research, the standard used by Blumberg, Cooper and Schindler (2014) will be adhered. In their research is spoken of multicollinearity when the Pearson correlation coefficient is higher than 0,8 or lower than -0,8. As the correlation matrix shows below, there is no correlation coefficient outside the range of -0,8 up to and including 0,8. None of the variables interact with each other to an extend which can be labeled as multicollinearity.

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6 Discussion and Conclusion

As already mentioned in the results section, the suspected relations did not come out as expected. Although they were constituted based on prior scientific research, the statistical analyses point out the opposite which definitely gives space to discussion and maybe further research.

6.1 Conclusion

In this scientific research, the influence of particular variables on the central theme `the new longform auditor`s report, haves been investigated. As a result of literature review in leading research in the field of accountancy, two dependent variables haves been formulated to investigate the degree of suggestibility. The dependent variables, respectively amount of words the auditor`s report consists of and the amount of key audit matters reported, are taken as dependent variables. The influencing independent variable is gender diversity of the audit committee. This independent variables has been is chosen because of the intended increase in influence of the audit committee due to the new launched longform auditor`s report. Because several scientific papers have been writtenwrote about the level commitment of managers and supervisors during their career, the average age of the audit committee members has been taking into consideration by representing a moderating variable tenure. Although a relation among the particular variables meant was expected, several factors could have some impact and therefore two important an probably influencing variables (size and audit committee members) have been added as control variables. After performing a regression analysis, which has been checked for multicollinearity, the results show a completely different picture. For none of the hypotheses as they were formulated significant evidence has been found. Moreover the expected positive relation between the degree of gender diversity and the number of key audit matters reported was not only insignificant, but also negative while a positive relation was expected. Last but not least, the expected positive interaction of moderator tenure, turned out into a negative relation for both the hypothesis. However, because of the relation between the degree of gender diversity in the audit committee and the number of key audit matters reported which turned out negative, the negative moderating variable tenure influences this relation a bit like expected. Because the negative moderator lowers the negative effect of gender diversity on the number of key audit matters, it can also be formulated as the moderator makes the relation between both variables more positive, as predicted.

All in all, for both the hypothesis can be stated that there is no significant evidence to accept H1 (positive relation) and reject H0 (no relation found). In other words, there is no statistical evidence found for stating that the degree of gender diversity in audit committees is positive related to the number of key audit matters reported or the comprehensiveness of the longform auditor`s report.

Unless the robustness checks applied, there are some limitations to this research in this form. Although the archival data is carefully prepared and has as its goal enable scientific research, archival data always contains limitations. Because it is impossible to take into consideration all factors which may influence the relation between gender diversity in audit committees, number of key audit matters and comprehensiveness of reporting, a small sample of variables are included. This is a limitation for the external validity, which makes it difficult to generalize any particular outcome for this research.

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Another limitation refers to the playing field of the cultural dimensions theory by Hofstede (2001). Although this theory has been used to indicate the main differences between men and women, Hofstede used the criteria`s in this theory to divide countries. In his theory, particular countries are pointed out as countries with a predominantly masculine or feminine culture, however the question remains if this allocation can also be applied one-one on audit committees as is the case in this study.

Moreover a limitation of this study is the measurement of audit committee tenure (see.

moderating variable chap. 4). Because tenure is normally used to express the length of the period someone participated in a particular body, it seems that in this study there has been made a mismatch when using the word tenure. However tenure is used to indicate in which career phase the several audit committee members are arrived. The older the committee members are, the closer they get to the end of their careers which has possible consequences for their decision making process as Ali and Zhang (2015) explain in their study. However by just measuring tenure as the period of participation in a particular body, we may face situations in which older people who probably facing their last job participate in a new governing body which will make their tenure start at zero again. Without the broader view of tenure, those older committee members would be counted as starters with a low tenure measure. However, because this study is based on decision making theory of Ali & Zhang (2015), we need to express the absolute career phase. The broader view of tenure used is this study is therefore likely to be less restrictive for the validity than measuring tenure purely by years of office.

Last but not least, the final limitation is the fact that the accountant's gender is not included. Due to the limited possibilities for this research, only gender diversity within the audit committee has been measured. Although the audit committee can influence the process of determining the key audit matters because of their direct contact with the accountant according to Böhm et al. (2016), is the final judgment to the accountant who`s gender may also have influence. The influence of the accountant's gender is, as an addition to this study, perhaps a suggestion for further research

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https://www.rijksoverheid.nl/actueel/nieuws/2014/09/25/dijsselbloem-maant-accountants-tot-verbeteringen

https://www.pvda.nl/nieuws/accountant-moet-weer-te-vertrouwen-zijn/

Met opmaak: Lettertype: Times New Roman Met opmaak: Lettertype: (Standaard) Times New Roman

Met opmaak: Lettertype: (Standaard) Times New Roman,

The effect of audit committee characteristics on the audit reports designed by the new auditing standard.