The Monitoring Effectiveness of Co-Opted Audit Committees

65 Pages Posted: 31 Jan 2013 Last revised: 12 May 2018

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

Jian Zhou

University of Hawaii at Manoa

Date Written: March 1, 2017

Abstract

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

Cassell, Cory A. and Myers, Linda A. and Schmardebeck, Roy and Zhou, Jian, The Monitoring Effectiveness of Co-Opted Audit Committees (March 1, 2017). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2209135 or http://dx.doi.org/10.2139/ssrn.2209135

Cory A. Cassell (Contact Author)

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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