Audit Committee Financial Expertise and Earnings Management: The Role of Status

Posted: 7 Oct 2013 Last revised: 29 Aug 2014

See all articles by Patrick Badolato

Patrick Badolato

University of Texas at Austin

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business

Matthew Ege

Texas A&M University - Department of Accounting

Date Written: July 8, 2014

Abstract

Regulatory pressure to increase both audit committee financial expertise and board independence has resulted in lower status for audit committees relative to management. This status differential is relevant because expertise and relative status are important determinants of each party’s ability to influence outcomes, particularly when parties face conflicting goals. We find that audit committees with both financial expertise and high relative status are associated with lower levels of earnings management, as measured by accounting irregularities and abnormal accruals. These results speak to benefits and limitations of financial expertise, which have been the focus of considerable debate.

Keywords: audit committees, earnings management, status, financial expertise

JEL Classification: M41

Suggested Citation

Badolato, Patrick and Donelson, Dain C. and Ege, Matthew, Audit Committee Financial Expertise and Earnings Management: The Role of Status (July 8, 2014). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2335632 or http://dx.doi.org/10.2139/ssrn.2335632

Patrick Badolato

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Dain C. Donelson (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

Matthew Ege

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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