This study presents new evidence that suggests the presence of AFAPs and UFAPs on the audit committee has the potential to reduce threats to auditor independence by pre-approving the purchase of less NAS form the auditor. The findings of this study are consistent with the view that AFAPs serving as independent audit committee members appear not to make economic decisions in favor of their former audit firm, and, thus, may be exercising objective and independent oversight to enhance auditor independence. This evidence is also in line with the goal of SOX to reduce actual or perceived threats to auditor independence. From a regulatory perspective, the findings suggests that concerns about audit firm alumni on client’s audit committees may not be warranted in the post-SOX environment and the three-year cooling period rule may be unnecessary. However, further research in other contexts is needed.
For more information on this study, please contact Vic Naiker.
Naiker, V., D. S. Sharma, and V. D. Sharma. 2013. Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor? The Accounting Review 88 (1): 297–326.
Female board presence has a beneficial impact on a board of director’s governance function and is negatively associated with financial restatements, a costly ordeal for any company. Increasing board diversity through many characteristics (culture, age, etc.) helps avoid the pitfalls of groupthink and leads to better corporate governance.
For more information on this study, please contact Lawrence J. Abbott at the University of Wisconsin-Milwaukee (abbotl@uwm.edu).
Abbott, L. J., S. Parker, and T. J. Presley. 2012. Female Board Presence and the Likelihood of Financial Restatement. Accounting Horizons 26 (4): 607-629
The evidence indicates that the market values the presence of audit committee financial experts who have previous accounting experience on the board and reacts negatively if such directors leave the company. Furthermore, the results indicate a negative stock market reaction when a short-tenured audit committee director leaves the board. Departures of audit committee members could be early warning signals for larger problems in the long run.
For more information on this study, please contact Meghna Singhvi (Meghna.Singhvi@LMU.EDU)
Singhvi, M., D.V. Rama and A. Barua. 2013. Market reactions to departures of audit committee directors. Accounting Horizons 27(1): 113-128
The results of this study suggests that the economic costs firms incur to improve their governance environment are effective in helping to restore some of the firm’s credibility after a fraudulent reporting event. The study supports prior research that associates weak governance structures with fraudulent financial reporting. Just as important, the results indicate that fraud firms receive some positive economic benefits from this recovery strategy, at least in terms of abnormal market returns.
Farber, D. 2005. Restoring Trust after Fraud: Does Corporate Governance Matter? The Accounting Review 80 (2): 539-561.
Auditors should be interested in these findings both for designing an effective engagement and for properly considering risk and liability during the client acceptance stage of the audit. Firms wherein the board contains multiple directors with long tenure are riskier, and auditors should consider that fact when deciding whether to accept the client and when designing the audit.
Sharma, V.D. and E.R. Iselin. 2012. The Association between Audit Committee Multiple-Directorships, Tenure, and Financial Misstatements. Auditing: A Journal of Practice and Theory. (31) 3: 149–175.
The results of this study shed light on some unanticipated effects of the SOX mandate for “independent” audit committee members. While the growth in board and audit committee size that followed this mandate has led to improvements in audit committee expertise, CEOs might still appoint or maintain directors from their personal network of friends to build an audit committee that is sympathetic to their reporting choices.
Furthermore, the evidence is informative for shareholders, nomination and governance committees. Such parties might refrain from appointing a director in the audit committee who is too closely connected to the CEO. Additionally, it may be important to require more disclosure about the nature and type of social connections between audit committee members and the CEO.
For more information on this study, please contact Liesbeth Bruynseels.
Bruynseels, L. and E. Cardinaels. 2014. The Audit Committee: Management Watchdog or Personal Friend of the CEO? The Accounting Review 89 (1): 113-145.
The findings indicate that audit committee members who have industry knowledge enhance financial reporting quality and external audit oversight beyond what is provided by members with only financial expertise. Therefore, standard setters and regulators such as the SEC should consider revisiting this issue and recommend that audit committees include member(s) who possess a combination of industry specific knowledge and financial expertise. Finally, since companies commonly have members with industry experience on their boards, they should consider appointing these members to serve on the audit committee.
For more information on this study, please contact Jeffrey Cohen.
Cohen, J., Hoitash, U., Krishnamoorthy, G., and Wright. 2014. The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process. The Accounting Review (January): 243-273
The results of this study suggest that auditors do take into consideration board roles in their control risk assessments. In addition, both dimensions of board structure are suggested to affect assigned audit hours. These findings provide additional insights into whether auditors are able to integrate adequately the board roles into their audit planning. The results have implications for audit firms in better understanding how auditors incorporate the board roles into their risk assessments and audit planning. Further, the results suggest that, in line with PCAOB AS 2, auditors rely on a more complex set of factors than simply the monitoring role of boards.
Cohen, J.C., G. Krishnamoorthy, and A.M. Wright. 2007. The Impact of Roles of the Board on Auditors’ Risk Assessments and Program Planning Decisions. Auditing: A Journal of Practice and Theory 26 (1): 91-112.
The results of this study show that auditors consider the influence that the CEO has over the audit committee in determining whether the audit committee is likely to support the audit team when resolving issues with management. To the extent that auditors feel that CEO influence decreases audit committee support of the external auditor this undermines the independent reporting line that the audit committee should provide. Current audit standards do not address this situation.
Cohen, J.R., L.M. Gaynor, G. Krishnamoorthy, and A.M. Wright. 2011. The Impact on Auditors Judgments of CEO Influence on Audit Committee Independence. Auditing: A Journal of Practice and Theory 30 (4): 129-147.
The overall message of the interviews perhaps is best captured by one interviewee, who described a “strange little dance.” Throughout the interviews, the authors find evidence that the NC must “dance” through a complex decision landscape that includes potential CEO influence over the nomination process, consideration of formal versus informal processes, frequent previous ties between NC members and the CEO, a nearly pervasive focus on chemistry and comfort, and concerns about external legitimacy and board effectiveness. Such complexity offers the NC numerous opportunities to stumble or fall, and it demonstrates the need for multiple theoretical perspectives in interpreting the findings. Such complexity, or limited observability of NC-related outputs, also could serve to insulate the NC from scrutiny or regulation.
Clune, R., Hermanson, D. R., Tompkins, J. G., & Ye, Z. 2014. The Nominating Committee Process: A Qualitative Examination of Board Independence and Formalization. Contemporary Accounting Research 31 (3): 748-786.