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    An Empirical Analysis of the Effects of Accounting Expertise...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.01 Board/Audit Committee Composition, 13.02 Board/Financial Experts 
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    Title:
    An Empirical Analysis of the Effects of Accounting Expertise in Audit Committees on Non-GAAP Earnings Exclusions
    Practical Implications:

    Given the Public Company Accounting Oversight Board’s (PCAOB) current proposal for auditors to provide assurance on non-GAAP information or earnings releases, the results of this study are important for regulators and boards of directors in their evaluation of the desirable attributes for audit committee financial experts. This study suggests that the audit committee financial expert designation is likely best held by a director who brings to the table more than just supervisory experience over the financial reporting function; lessons gained from actually performing financial accounting functions seem to enhance the audit committee’s ability to monitor management’s non-GAAP financial measures and rationale for excluding charges as infrequent, unusual or nonrecurring.

    For more information on this study, please contact Xu (Frank) Wang.

    Citation:

    Seetharaman, A., X. Wang, and S. Zhang. 2014. An Empirical Analysis of the Effects of Accounting Expertise in Audit Committees on Non-GAAP Earnings Exclusions. Accounting Horizons 28(1): 17-37.

    Keywords:
    Non-GAAP Earnings, Accounting Expertise, Audit Committee Composition, Financial Experts.
    Purpose of the Study:

    U.S. stock exchanges and lawmakers rely on audit committees to help safeguard the accuracy and reliability of corporate GAAP and non-GAAP financial information. However, there are gaps in our knowledge of how audit committees perform, especially with respect to companies’ non-GAAP financial information.

    An important motivation of this paper is that unlike companies’ GAAP-based financial measures, non-GAAP numbers are unaudited and not well-defined. These numbers are therefore subject to the discretion of the managers who may or may not have their interests aligned with those of the stakeholders of the companies. In this study, the authors address these concerns by focusing on the audit committee’s role in monitoring companies’ non-GAAP financial disclosures.   

    The authors examine the association between audit committee appointments of accounting experts (relative to appointments of nonaccounting experts) and the company’s non-GAAP earnings numbers. Specifically, the authors investigate whether the appointment of an audit committee accounting expert, in contrast to the appointment of a nonaccounting expert, would improve the quality of non-GAAP earnings while reducing the magnitude of potential misuse.

    Design/Method/ Approach:

    The research evidence is collected from data of publicly traded companies in the 1998-2005 time period.  The authors identify audit committee appointments as either an accounting expert appointment or a nonaccounting expert appointment, which in turn is further classified into two sub-groups: (1) supervisory expert appointment, and (2) other appointment. Each appointment is a deliberate intervention that helps shed light on the differential effects of one type of appointment from another in terms of monitoring the quality of non-GAAP earnings numbers. 

    Findings:
    • The authors find a larger decline in non-GAAP earnings exclusions following the appointment of accounting (rather than nonaccounting) experts to audit committees.
    • The authors find that accounting experts are associated with higher-quality post-appointment non-GAAP earnings exclusions.
    • The authors find that accounting expert appointments are associated with higher quality non-GAAP earnings exclusions than supervisory expert appointments.
    Category:
    Governance
    Sub-category:
    Board/Audit Committee Composition, Board/Financial Experts