Audit Committee Effectiveness in the Largest US Public Hospitals : An Empirical Study

Most research focuses on the role of audit committees in the private sector and less in the public sector, especially public hospitals. Therefore, we investigate the role and quality of public hospital audit committees in controlling problems in financial reporting and in major Federal award programs. We investigate all publicly available Office of Management and Budget Circular A-133 audit reports on internal controls over Federal reporting for public hospitals. We then conduct a follow-up study on the administrators of these reporting units. We find the presence of a committee and the committee’s specific quality characteristics of independence, financial expertise, and increased activity, positively correlate with reduced frequencies of internal control problems. In addition, we find audit committees with financial expertise associated less frequently with material weaknesses over financial reporting and over major Federal programs. Our findings extend corporate governance research to the public health care sector, provide additional support for the Sarbanes-Oxley Act of 2002 and the Office of Management and Budget Circular A-123 requirements, and answer questions found in prior research on non-profit hospitals given by Vermeer et al. (2006) and Pridgen & Wang (2007)