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    The Effect of Audit Committee Industry Expertise on...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.01 Board/Audit Committee Composition 
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    Title:
    The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process
    Practical Implications:

    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.

    Citation:

    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

    Keywords:
    Corporate governance, Industry expertise, Financial expertise, Audit committees, Restatements, Discretionary accruals, Audit fees, Non-audit fees.
    Purpose of the Study:

    Calls from practice suggest that audit committee members with industry expertise can improve audit committee effectiveness. Nevertheless, regulators have focused on the financial expertise of the audit committee. We expect that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company‚Äôs operations within a particular industry. 

    Design/Method/ Approach:

    Using publically available data from 2001-2007 for a large and representative sample of over 18,000 observations from public companies, we examine two measures of financial reporting quality (financial restatements and earnings management) and two measures of external auditor oversight (audit and non-audit fees).

    Findings:

    As predicted, we find that audit committee members who are both accounting and industry experts are associated with higher financial reporting quality than those with only accounting expertise. We also find that in certain instances, supervisory experts (i.e., those who have gained financial expertise by supervising preparers of financial reports such as CEOs) who are also industry experts are associated with higher financial reporting quality than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with financial expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process.

    Category:
    Governance
    Sub-category:
    Board/Audit Committee Composition