The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process

Abstract:     
Calls from practice suggest that audit committee members with industry expertise can improve the effectiveness of the audit committee in overseeing the financial reporting process. Nevertheless, regulators and extant literature have focused on the financial expertise of the audit committee. We posit that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company’s operations within a particular industry. Taking a holistic view of the monitoring roles of the audit committee, we examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two measures relating to oversight of the external auditor (audit and non-audit fees). As predicted, we find, across all measures, that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise. We also find that in certain instances, supervisory experts who are also industry experts perform better than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with accounting expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process.

Number of Pages in PDF File: 46

Keywords: Corporate governance, Industry expertise, Financial expertise, Audit committees, Restatements, Discretionary accruals, Audit fees, Non-audit fees

working papers series