The Association Between Board Risk Oversight and the Risk of Material Misstatement

Posted: 9 Aug 2018

See all articles by Mark S. Beasley

Mark S. Beasley

North Carolina State University

Allen D. Blay

Florida State University

Christina Lewellen

North Carolina State University - Department of Accounting

Michelle McAllister

Northern Arizona University

Date Written: July 25, 2018

Abstract

Corporate governance failures in the early 2000s and the financial crisis that emerged in 2008 have contributed to heightened expectations for the board of directors to strengthen its oversight of the firm’s risk management processes. Thought leaders (COSO 2013, 2017, ISO 2018; NYSE 2004; SEC 2010) stress the importance of board risk oversight processes; however, we know little about what boards actually do to fulfill their risk oversight responsibilities. Most of the existing research has focused on the association between certain board of director input characteristics (e.g. member composition, independence, expertise, tenure, etc.) and a variety of financial reporting related outcomes. Studies have called for additional examination of what boards actually do to fulfill their oversight roles (e.g. Cohen, Krishnamoorthy and Wright 2017; Beasley, Carcello, Hermanson, and Neal 2009). Our study responds to this need by utilizing proxy disclosures about the board’s role in risk oversight, instituted by the SEC in 2010, to examine whether boards more engaged in risk oversight processes are associated with a lower risk of material misstatement (RMM) in the financial statements, while controlling for board input characteristics documented by prior studies. We find that boards more engaged in risk oversight are positively associated with two avenues for mitigating RMM: effective internal control over financial reporting and higher auditor quality. In addition, we find that boards with more extensive risk oversight processes are associated with fewer actual instances of materially misstated financial statements.

Keywords: Board Risk Oversight, Internal Control, Corporate Governance, Risk Management, Risk of Material Misstatement

JEL Classification: G30, M40

Suggested Citation

Beasley, Mark S. and Blay, Allen Dennis and Lewellen, Christina and McAllister, Michelle, The Association Between Board Risk Oversight and the Risk of Material Misstatement (July 25, 2018). Available at SSRN: https://ssrn.com/abstract=3219885

Mark S. Beasley

North Carolina State University ( email )

Box 8113
Raleigh, NC 27695-8113
United States
919-515-6064 (Phone)
919-515-4446 (Fax)

Allen Dennis Blay

Florida State University ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States
850-727-0953 (Phone)

Christina Lewellen (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Michelle McAllister

Northern Arizona University ( email )

101 E McConnell Dr
Flagstaff, AZ 86011
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
952
PlumX Metrics