Does the SOX Definition of an Accounting Expert Matter? the Association between Audit Committee Directors' Accounting Expertise and Accounting Conservatism

53 Pages Posted: 8 Dec 2005

See all articles by Gopal V. Krishnan

Gopal V. Krishnan

Bentley University

Gnanakumar Visvanathan

George Mason University - Department of Accounting

Date Written: July 29, 2007

Abstract

The Sarbanes-Oxley Act mandates the disclosure of whether at least one member of the audit committee is a financial expert. However, the final version of the rule adopted by the SEC defined experts to include both accounting and non-accounting experts. Did the SEC do the right thing? Are the non-accounting experts just as competent as the accounting experts in enhancing the quality of financial reporting? For a sample of S&P 500 firms we examine whether the audit committee's financial expertise is associated with accounting conservatism, a fundamental characteristic of financial reporting. Our results suggest that an audit committee's financial expertise is positively associated with conservatism when financial expertise is defined to include only accounting experts. Our findings are consistent with the notion that accounting expertise contributes to greater monitoring by the members of the audit committee which in turn enhances conservatism. However, this finding is conditional upon the firm's overall corporate governance, i.e., in weak boards accounting financial expertise is ineffective in promoting conservative accounting. Our findings have implications for regulators, corporate boards, and the accounting profession. Our findings are also relevant to regulators in other countries who are considering adopting measures to enhance corporate governance, particularly the effectiveness of the audit committees.

Keywords: Audit committee, Conservatism, SOX, Accounting expertise

JEL Classification: G34, M41

Suggested Citation

Krishnan, Gopal and Visvanathan, Gnanakumar, Does the SOX Definition of an Accounting Expert Matter? the Association between Audit Committee Directors' Accounting Expertise and Accounting Conservatism (July 29, 2007). Available at SSRN: https://ssrn.com/abstract=866884 or http://dx.doi.org/10.2139/ssrn.866884

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Gnanakumar Visvanathan

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States
703-993-4236 (Phone)

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