Preserving an image of effective monitoring can be just as important as preserving effective monitoring itself. AC-member ineffectiveness due to financial reporting increases the likelihood of AC turnover for both the AC-members who served during the events precipitating the financial reporting failure as well as the “tainted” AC-members (even if they were not serving as AC-members when the events precipitating the financial reporting failure occurred). This result shows that shareholders may take bold and visible actions to “clean house” when such financial reporting failures are revealed. Regarding individual characteristics, under normal circumstances characteristics of an AC-member’s potential ineffectiveness such as multiple board commitments may actually be seen as desirable by shareholders perhaps signaling the quality of the AC-member. However, when shareholder dissent increases these individual characteristics of an AC-member’s potential ineffectiveness increases the likelihood of turnover for that particular AC-members but does not “taint” the other AC-members. That is, characteristics once viewed as slightly positive for specific AC-members become negatives when shareholder dissent increases.
Kachelmeier, S. J., S. J. Rasmussen, and J. J. Schmidt. 2016. When Do Ineffective Audit Committee Members Experience Turnover?. Contemporary Accounting Review 33 (1): 228-260.
The results of this study are important for audit firms to consider when designing their ethics and whistleblowing policies. The evidence indicates that auditors’ are sensitive to power distance, and while no main effect for prior organizational response was found, prior research suggests that there are other costs associated with the perception that a firm does not respond to reports of ethical violations. Furthermore, it indicates that gender plays a role in an auditor’s sensitivity to power distance, and that the perceived moral intensity of the violation, which influences reporting likelihood, is moderated by the position of the observer, relative to the perpetrator. The study highlights the importance of firm culture and the implementation and enforcement of effective whistleblowing and ethical polices on the likelihood of employees to report observed ethical violations.
For more information on this study, please contact Eileen Z. Taylor.
Taylor, E. Z., and M. B. Curtis. 2013. Whistleblowing in Audit Firms: Organizational Response and Power Distance. Behavioral Research in Accounting 25 (2): 21-43