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    The Role of Firm Status in Appointments of Accounting...
    research summary posted June 7, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.08 Impact of SEC Rules Changes/SarbOx, 13.0 Governance, 13.02 Board/Financial Experts, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
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    Title:
    The Role of Firm Status in Appointments of Accounting Financial Experts to Audit Committees
    Practical Implications:

    The primary contribution of this study is finding that status-related concerns can prevent firms from appointing AFEs to their boards. This result has clear implications for regulators, as firms without AFEs are more likely to encounter accounting reporting problems. Specifically, recent regulation changes by the SEC to introduce a more broad definition of “financial expert” may damage the improvement of financial reporting that was intended by SOX. This research is consistent with previous findings that directors’ concerns for firm status and their own welfare can negatively affect accounting reporting quality. 

    Citation:

    Erkens, D. H., and S. E. Bonner. 2013. The Role of Firm Status in Appointments of Accounting Financial Experts to Audit Committees. The Accounting Review 88 (1): 107–136.

    Keywords:
    accounting financial experts; audit committees; director status; firm status
    Purpose of the Study:

    Since 1999 regulators have exerted pressure on firms to appoint accounting financial experts (AFE) to their audit committees in an attempt to improve the monitoring of financial reporting. Despite prior research showing more positive financial reporting outcomes, firms have been reluctant to appoint these experts. This study examines the effect of firm status on some firms’ reluctance to appoint AFEs to their audit committees. The authors propose that higher status firms may be more reluctant to appoint AFEs, which could potentially result in more financial reporting problems. 

    Design/Method/ Approach:

    The sample selected consists of 875 firms and 3,590 firm-year observations that are included in the S&P 1500 index from 1999 to 2008. Firms included in the sample have board member biographical information and board composition data available in the RiskMetrics or BoardEx databases and cannot have previously appointed an AFE to the audit committee. This data, combined with an aggregate measure of firm and director status is used to test the following hypotheses:

    1. The average status of appointed AFEs is less than the average status of sitting directors.
    2. Director status is positively related to firm status
    3. The difference in status of appointed AFEs and sitting directors is larger for higher status firms than it is for lower status firms.
    4. The probability that a firm will appoint an AFE to its audit committee in a given year is negatively related to the status of the firm.
    Findings:
    • Higher status firms were reluctant to appoint AFEs to their audit committees because typical AFEs are of lower director status than typical directors. 
    • The gap between the status of AFEs and sitting directors was larger for higher status firms. 
    • Directors’ personal incentives related to appointing higher status directors outweigh the concerns about damaging firm status.
    • Firms that have directors who serve on other boards with AFEs, have corporations nearby with AFEs, or have an auditor with a significant fraction of clients that have AFEs are more likely to appoint AFEs to their audit committees.
    • Firms with complex accounting or past accounting problems are also more likely to appoint AFEs. 
    Category:
    Corporate Matters, Governance, Independence & Ethics
    Sub-category:
    Audit Committee Effectiveness, Board/Financial Experts, Impact of SEC Rules Changes/SarBox
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