CEO Involvement in Selecting Board Members, Audit Committee Effectiveness, and Restatements

54 Pages Posted: 18 Jun 2010

See all articles by Joseph V. Carcello

Joseph V. Carcello

University of Tennessee

Terry L. Neal

University of Tennessee

Zoe-Vonna Palmrose

University of Southern California

Susan Scholz

University of Kansas - Accounting and Information Systems Area

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2009

Abstract

Research finds independent audit committees and audit committee financial experts are generally effective in monitoring the financial reporting and auditing processes. However, not all audit committees that appear in form to be independent are in fact actually independent, and not all financial experts with similar backgrounds and credentials are equally effective. CEO involvement in the board selection process can affect whether an audit committee substantively functions as an independent one. We use financial statement restatements to examine whether the benefits of having an independent and expert audit committee are diminished, or even eliminated, when the CEO is involved in the selection of board members. Our results provide some evidence that the monitoring benefits of having an independent and expert audit committee are only maintained when the CEO is not formally involved in selecting board members, although our proxy for CEO involvement in the director selection process is likely subject to some measurement error. Further, we find that these results appear to be driven by the more severe restatements, including misstatements in conjunction with fraudulent financial reporting. In addition, we find that our results continue to apply in the post-SOX period, a period where we have a more exact measure of CEO involvement in the director selection process. Finally, we find that the stock market’s negative reaction to a restatement is mitigated only when the audit committee is independent and the CEO was not involved in selecting board members.

Keywords: CEO Involvement, Board Selection, Audit Committee, Restatements

JEL Classification: G30, M41

Suggested Citation

Carcello, Joseph V. and Neal, Terry L. and Palmrose, Zoe-Vonna and Scholz, Susan, CEO Involvement in Selecting Board Members, Audit Committee Effectiveness, and Restatements (June 18, 2009). Available at SSRN: https://ssrn.com/abstract=1626866 or http://dx.doi.org/10.2139/ssrn.1626866

Joseph V. Carcello (Contact Author)

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

Terry L. Neal

University of Tennessee ( email )

639 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-2664 (Phone)
865-974-4631 (Fax)

Zoe-Vonna Palmrose

University of Southern California ( email )

Marshall School of Business, 0441
Los Angeles, CA 90089-0441
United States
213-740-5019 (Phone)
213-747-2815 (Fax)

Susan Scholz

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)

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