The Audit Committee: Management Watchdog or Personal Friend of the CEO?

Posted: 2 Mar 2012 Last revised: 27 Aug 2013

See all articles by Liesbeth Bruynseels

Liesbeth Bruynseels

KU Leuven - Faculty of Economics and Business (FEB)

Eddy Cardinaels

Tilburg University - Tilburg University School of Economics and Management; KU Leuven

Date Written: August 2013

Abstract

To ensure that audit committees provide sufficient oversight over the auditing process and quality of financial reporting, legislators have imposed stricter requirements on the independence of audit committee members. Although many audit committees appear to be “fully” independent, anecdotal evidence suggests that CEOs often appoint directors from their social networks. Based on a 2004 to 2008 sample of U.S.-listed companies after the Sarbanes-Oxley Act we find that these social ties have a negative effect on variables that proxy for oversight quality. In particular, we find that firms whose audit committees have “friendship” ties to the CEO purchase fewer audit services and engage more in earnings management. Auditors are also less likely to issue going-concern opinions or to report internal control weaknesses when friendship ties are present. On the other hand, social ties formed through “advice networks” do not seem to hamper the quality of audit committee oversight.

Keywords: social ties, financial reporting quality, audit committee, monitoring

JEL Classification: M4,G3

Suggested Citation

Bruynseels, Liesbeth and Cardinaels, Eddy, The Audit Committee: Management Watchdog or Personal Friend of the CEO? (August 2013). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2014613 or http://dx.doi.org/10.2139/ssrn.2014613

Liesbeth Bruynseels (Contact Author)

KU Leuven - Faculty of Economics and Business (FEB) ( email )

Naamsestraat 69
Leuven, 3000
Belgium
+32 16 373723 (Phone)

Eddy Cardinaels

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Warandelaan 2
Tilburg, 5000 LE
Netherlands
+31 134668231 (Phone)

HOME PAGE: http://www.tilburguniversity.edu/webwijs/show/?uid=e.cardinaels

KU Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium
+32 16326984 (Phone)

HOME PAGE: http://www.kuleuven.be/wieiswie/nl/person/00013472

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