The Number of Professionally Certified Accounting Experts on Audit Committees and Confidence in Earnings: A Study of Retail Investors’ Perceptions

Abstract

The purpose of this study is to determine whether the composition of a company’s audit committee affects decisions by retail (non-institutional) investors. We examine if these investors’ confidence in reported earnings is affected by the number of committee experts under the U. S. Securities and Exchange Commission’s original, more restrictive definition of an expert (accountants and auditors), the expanded definition, or those who do not qualify under either definition. A sample of AAII (American Association of Independent Investors) members responded to an Internet-based questionnaire and assessed their confidence in the earnings quality of a hypothetical company, contingent on the financial expertise represented in the committee. Results suggest that as the number of Certified Public Accountants (experts under the more restrictive definition) on an audit committee increases, there is a general tendency for confidence in earnings to increase also. The statistical significance of this trend however is illuminated by both demographic and behavioral characteristics of the investors.

Keywords: CPAs, audit committee composition, audit committee financial expertise

JEL Classification: M42, M48