Contents lists available at ScienceDirect Economic Systems journal homepage: www.elsevier.com/locate/ecosys Audit committees and financial reporting quality: The 8th EU Company Law Directive perspective Ujkan Bajra a,b, ⁎ , Simon Čadež c a Institute for Economic Research and Legal Studies, Robert Doll, 10000 Prishtinë, Republic of Kosovo b Faculty of Business, University Haxhi Zeka, Eliot Engel, 30000 Pejë, Republic of Kosovo c Department of Accounting and Auditing, Faculty of Economics, University of Ljubljana, Kardeljeva ploščad 17, Ljubljana, Slovenia ARTICLE INFO JEL classification: G3 G38 M48 Keywords: Audit committee Audit committee competencies Financial reporting quality 8th Company Law Directive Corporate governance ABSTRACT In order to increase corporate governance quality, the 8th EU Company Law Directive enacted a mandatory audit committee in publicly listed companies in the EU and defined its tasks and responsibilities. In response to the directive, we examine the incremental value of audit com- mittee monitoring effectiveness and audit committee competencies over the mere existence of an audit committee. We find that audit committee monitoring effectiveness and competencies are positively associated with financial reporting quality, whereas, somewhat surprisingly, the effect of the existence of an audit committee is negative. This finding shows that the existence of audit committees is a necessary but not a sufficient condition for enhancing financial reporting quality. Collectively, the study’s findings suggest that the 8th Directive has had a positive effect on corporate governance quality and, in turn, financial reporting quality in the EU. 1. Introduction An audit committee is an operating committee of a company’s board of directors in charge of overseeing financial reporting and disclosure (Choi et al., 2014). Idealistically, the aim of financial reporting is to present reliable information about the company’s financial position and performance that is useful for a wide range of users when making economic decisions (Barth et al., 2008). However, in reality financial reports are often distorted or even fraudulent (Blanco et al., 2014; Cho et al., 2015), thus impairing the ability of interested constituents to make rational decisions. Audit committee authorities typically involve the oversight of financial reporting, monitoring of accounting policies, oversight of external auditors, regulatory compliance, risk management, and special investigations in cases of suspect or problematic accounting practices (Dezoort et al., 2002). Despite widespread conjectures that the audit committee’s function improves financial reporting quality, these are not unequivocally supported by empirical evidence. For example, Alves (2013) and Stewart and Munro (2007) found that the presence of an audit committee is not associated with the quality of financial reporting. The equivocal evidence is likely attributable to the fact that audit committees are highly diverse in terms of their size, in- dependence, monitoring effectiveness, competencies, and other relevant quality features (Choi et al., 2014; Gendron and Bédard, 2006). In effect, the existence of an audit committee within a company may be just a necessary, but not a sufficient condition for enhancing financial reporting quality. The weaknesses of audit committees in particular and corporate governance systems in general were highlighted by several financial scandals (e.g. Enron, Parmalat) at the turn of the millennium (Bajra and Cadez, 2017; Črnigoj and Verbič, 2014; Kutan, https://doi.org/10.1016/j.ecosys.2017.03.002 Received 3 September 2016; Received in revised form 2 February 2017; Accepted 30 March 2017 ⁎ Corresponding author. E-mail addresses: ujkan.bajra@ierls.net, ujkan.bajra@unhz.eu (U. Bajra). Economic Systems 42 (2018) 151–163 Available online 01 December 2017 0939-3625/ © 2017 Published by Elsevier B.V. T