Optimal versus Suboptimal Choices of Accounting Expertise on Audit Committees and Earnings Quality

54 Pages Posted: 21 Oct 2013 Last revised: 2 Nov 2013

See all articles by Daniel Bryan

Daniel Bryan

University of Washington, Tacoma

Carol Liu

Arizona State University (ASU), W.P. Carey School of Business, School of Accountancy, Students

Samuel L. Tiras

Indiana University - Kelley School of Business

Zili Zhuang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: March 15, 2013

Abstract

By employing a Heckman two-stage selection model, we identify whether employing a financial expert with or without accounting expertise on the audit committee is optimal and how earnings quality varies across these optimal and suboptimal choices. Using four earnings quality measures (informativeness, timely loss recognition, earnings persistence, and accruals quality), we find no differences in earnings quality between firms optimally choosing an expert with or without accounting expertise, consistent with Demsetz and Lehn (J Polit Econ 93:1155-1177,1985) and others who argue that when firms optimize their choice (i.e., accounting expertise), there should be no difference across the characteristic (i.e., earnings quality) being examined. We do find, however, earnings quality is significantly higher for firms that optimally choose an accounting expert relative to firms that choose (with/without accounting expertise) suboptimally. Finally, firms suboptimally choosing an accounting expert exhibit no improvement, or even lower earnings quality, than firms that optimally choose no accounting expert. Our results provide important evidence of the impact accounting expertise has on earnings quality when considering the firm’s choice.

Keywords: Accounting expertise, Audit Committee, Earnings Quality, Self-Selection

JEL Classification: G38, M41, M48

Suggested Citation

Bryan, Daniel and Liu, Carol and Tiras, Samuel L. and Zhuang, Zili, Optimal versus Suboptimal Choices of Accounting Expertise on Audit Committees and Earnings Quality (March 15, 2013). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2342912

Daniel Bryan

University of Washington, Tacoma ( email )

Tacoma, WA

Carol Liu

Arizona State University (ASU), W.P. Carey School of Business, School of Accountancy, Students ( email )

Tempe, AZ
United States

Samuel L. Tiras (Contact Author)

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

Zili Zhuang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin N.T.
Hong Kong

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