Overlapping Membership on Audit and Compensation Committees, Audit Committee Equity Holdings, and Financial Reporting Quality

Australian Accounting Review, Forthcoming

Posted: 5 Jun 2014 Last revised: 10 Apr 2015

See all articles by Ahsan Habib

Ahsan Habib

Massey University - School of Accountancy; Massey University

Md. Borhan Uddin Bhuiyan

Massey University - School of Accountancy

Date Written: April 10, 2015

Abstract

This paper examines whether audit committee members of a board improve financial reporting quality if they are also on their organization’s compensation committee. Audit committees are responsible for overseeing the financial reporting process of organizations and have been urged to broaden their understanding of business risk and of the incentives provided by their firms’ executive compensation structures. Acknowledging the interrelationships among executive compensation, risk taking and financial reporting quality, members of audit and compensation committees have been advocating more information-sharing between the two committees. Using archival data on a sample of Australian Stock Exchange listed companies, and discretionary accruals as a proxy for financial reporting quality, this study finds that firms with overlapping committees have better quality financial reporting than those without such overlap. Our evidence for this is stronger in cases where managers tend to manage earnings upwards in order to meet or beat earnings benchmarks. We also find that the beneficial effect of the existence of overlapping committees is adversely affected by the equity holdings of directors with overlapping memberships.

Keywords: Audit committee, compensation committee, financial reporting quality, audit committee equity holdings

Suggested Citation

Habib, Ahsan and Bhuiyan, Md. Borhan Uddin, Overlapping Membership on Audit and Compensation Committees, Audit Committee Equity Holdings, and Financial Reporting Quality (April 10, 2015). Australian Accounting Review, Forthcoming . Available at SSRN: https://ssrn.com/abstract=2445936 or http://dx.doi.org/10.2139/ssrn.2445936

Ahsan Habib (Contact Author)

Massey University - School of Accountancy ( email )

Auckland
New Zealand

Massey University ( email )

Auckland
New Zealand

Md. Borhan Uddin Bhuiyan

Massey University - School of Accountancy ( email )

Palmerston North
New Zealand
+6494140800 (Phone)

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