The Impact of Audit Committee Effectiveness and Audit Quality on Financial Reporting Quality: The Case of Sri Lankan Banking Sector

M. V. C. I. Madhurangi and A.W.J.C Abeygunasekera

Despite the high contribution of the banking sector to the GDP in Sri Lanka and the importance of the role of audit committees in financial reporting quality maintenance, there is a dearth of research that emphasize on the impact of audit committee effectiveness and audit quality on financial reporting quality in the Sri Lankan context. To fill this lacuna, the study aims to identify the impact of audit committee effectiveness and audit quality on financial reporting quality in the banking sector in Sri Lanka during 2014 – 2018. The objectives were to identify whether there is any impact from these two factors and the kind of impact they have. Secondary data available on the Colombo Stock Exchange website of 30 Licensed Commercial Banks and Licensed Specialized banks were analyzed. The findings indicate that audit committee effectiveness (measured through audit committee size, audit committee meetings frequency and audit committee financial and accounting expertise) has an insignificant relationship on financial reporting quality. Under audit quality (measured through audit fees and audit firm size), audit fees do not show any significant relationship whereas audit firm size has a negative significant relationship on financial reporting quality. For the used control variables of this study, the leverage shows an insignificant relationship whereas the firm size has a positive significant relationship on financial reporting quality in the banking sector in Sri Lanka. This study contributes to practice by providing necessary and vital information to the regulatory institutions of the banking sector in Sri Lanka to make decisions to enhance the financial reporting quality and to enhance the disclosure requirements in the annual reports. It contributes to the extant literature by adding new knowledge through the examination and analysis of audit committee effectiveness and audit quality on financial reporting quality in the banking sector in Sri Lanka.