TY - JOUR
T1 - Directors’ duties of care and the value of auditing
AU - Banerjee, Suman
AU - Humphery-Jenner, Mark
N1 - Publisher Copyright:
© 2016
PY - 2016/11/1
Y1 - 2016/11/1
N2 - This paper uses court's decision in ASIC v Healy (The Centro Case) as a natural experiment through which to empirically examine, and demonstrate, the importance of strengthening directors’ duties of care. The Centro decision strengthened directors’ duties of care by requiring them to make an independent assessment of auditors’ reports, rather than merely relying on auditors’ statements. It also required them to have a base level of financial literacy and to look for, and notice, obvious issues, especially ones that are important in the context. The paper assesses the impact of the Centro case by analyzing whether Centro increased the market value of auditing expenditure. The results are positive: the strengthened directors duties are associated with higher CARs for firms that spend more on auditing. Further, after Centro, auditing expenditure had a more positive relationship with market values. Overall, the results demonstrate the importance of strengthening directors’ duties of care.
AB - This paper uses court's decision in ASIC v Healy (The Centro Case) as a natural experiment through which to empirically examine, and demonstrate, the importance of strengthening directors’ duties of care. The Centro decision strengthened directors’ duties of care by requiring them to make an independent assessment of auditors’ reports, rather than merely relying on auditors’ statements. It also required them to have a base level of financial literacy and to look for, and notice, obvious issues, especially ones that are important in the context. The paper assesses the impact of the Centro case by analyzing whether Centro increased the market value of auditing expenditure. The results are positive: the strengthened directors duties are associated with higher CARs for firms that spend more on auditing. Further, after Centro, auditing expenditure had a more positive relationship with market values. Overall, the results demonstrate the importance of strengthening directors’ duties of care.
KW - ASIC v Healey
KW - Audit committee
KW - Centro
KW - Companies Act Section 174
KW - Corporations Act Section 180
KW - Duty of care
KW - Financial Reporting
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U2 - 10.1016/j.frl.2016.05.004
DO - 10.1016/j.frl.2016.05.004
M3 - Article
AN - SCOPUS:84994164632
SN - 1544-6123
VL - 19
SP - 1
EP - 14
JO - Finance Research Letters
JF - Finance Research Letters
ER -