The Impact of Audit Committee Characteristics on the Enhancement of the Quality of Financial Reporting: an empirical study in the Spanish context Maria Consuelo Pucheta-Martínez* and Cristina de Fuentes The purpose of this paper is to analyse the relationship between the likelihood that a company will receive a qualified audit report (as a measure of the quality of financial information) and the existence and characteristics of the audit committee (AC). For listed companies that voluntarily created an AC in the period following the publication in 1998 of the Spanish Code of Corporate Governance, known as the Olivencia Code, we find that ACs size, the percentage of independent members in ACs, company size, losses reported in either or both of the previous two years, receiving the same qualified audit opinion as in the previous year and ownership concentration affect the likelihood of receiving error or non-compliance qualifica- tions. However, the existence of an AC and its composition are not factors associated with the receipt of audit reports containing uncertainties or scope limitations, while losses reported in either or both of the previous two years and receiving the same qualified opinion as in the previous year are. Keywords: Audit committee, audit quality, qualified audit reports, corporate governance, audit committee effectiveness 1. Introduction A s a result of notorious financial scandals such as WorldCom and Enron in the US and, on the European scene, the financial crises at Parmalat in Italy,Ahold in the Netherlands, and Gescartera and BBVA in Spain, among others, the reliability of financial reporting and the audit profession have fallen under a shadow of suspicion, and the role of the audit committee in the financial reporting process has received increased regulatory attention in recent years. These events have not left Spain untouched by international regulatory trends and recom- mendations aimed at reestablishing users’ trust in financial information. The regulatory response in the country is based on the Financial System Reform Act, 2002 (Law 44/22 November 2002), which seeks to achieve greater transparency and improve the credibil- ity of financial information by regulating auditors’ independence and providing for the mandatory creation of ACs in listed compa- nies. Hitherto, the AC had been voluntarily implemented by some corporations following the recommendations of the Olivencia Code of Good Governance (hereinafter CGG) pub- lished in 1998. The aim of this study is to contribute to the growing literature on the effectiveness of ACs in terms of the enhancement of financial *Address for correspondence: Universidad Jaume I de Castellón, Facultad de Ciencias Jurídicas y Económicas, Campus del Riu Sec, s/n, 12071 Castellón, Spain. E-mail: pucheta@cofin.uji.es 1394 CORPORATE GOVERNANCE Volume 15 Number 6 November 2007 © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA