The Role of Firm Status in Appointments of Financial Experts to Audit Committees

Abstract:     
Since 1999 regulators have attempted to improve the monitoring of financial reporting by exerting significant pressure on firms to appoint accounting financial experts (AFEs) to their audit committees. Yet, many firms have been reluctant to do so, which has made these firms more prone to financial reporting problems. We examine appointments of AFEs to the audit committees of S&P 1500 firms during the period 1999-2008 to explore whether concerns about the status of these experts discouraged firms from appointing them. We find that typical AFEs (CFOs and retired audit partners) have lower director status (board seats, trusteeships, social club memberships, and elite education) than other types of directors, and that this status gap is greater for higher status firms (larger, better connected, and more admired firms). Moreover, we find that higher status firms are less likely to appoint AFEs, suggesting that status-related concerns reduce the demand for accounting financial expertise on audit committees.

Number of Pages in PDF File: 50

Keywords: audit committees, financial experts, firm status, director status

JEL Classification: M41, G38

Accepted Paper Series