Voluntary Audit Committees, Network Centrality and Accrual Estimation Errors

Drawing on the theoretical foundations of both agency theory and social structure, we study the network of a firm’s board members and auditor, defined as monitoring network, and the voluntary adoption of an audit committee as well as determine whether they make inferences on a firm’s volatility of accrual estimation errors. We theorise that a central position in the monitoring network enables the exchange of relevant accounting information affecting a firm’s decision control and ultimately the quality of accounting accruals. A firm’s voluntary adoption of an audit committee has a distinct information intermediary role in this process. We show that auditor connectedness and a firm’s network centrality are associated with a firm’s volatility of accrual estimation errors. These relations are affected by the voluntarily adoption of an audit committee, and auditor connectedness with the accrual quality is influenced by a firm’s network centrality.