The Monitoring Effectiveness of Co-Opted Audit Committees
65 Pages Posted: 31 Jan 2013 Last revised: 12 May 2018
Date Written: March 1, 2017
We investigate the relation between audit committee co-option and financial reporting quality, where audit committee co-option is measured as the proportion of audit committee members who joined the board after the appointment of the current Chief Executive Officer (CEO). Because CEOs are often actively involved in the director nomination and selection process, we expect that higher levels of audit committee co-option will be associated with less effective monitoring, as evidenced by more financial statement misstatements and greater absolute discretionary accruals. Consistent with our expectations, we find a positive relation between audit committee co-option and misstatements as well as between audit committee co-option and absolute discretionary accruals. Our findings should be of interest to regulators, investors, and other stakeholders because we provide new evidence about how potential CEO influence on director nominations and audit committee appointments impacts the effectiveness of monitoring by the audit committee.
Keywords: audit committee, board of directors, co-option, discretionary accruals, independence, misstatements
JEL Classification: G34, M40, M41
Suggested Citation: Suggested Citation