CEO Involvement in Selecting Board Members and Audit Committee Effectiveness

47 Pages Posted: 8 Aug 2006

See all articles by Joseph V. Carcello

Joseph V. Carcello

University of Tennessee

Terry L. Neal

University of Tennessee

Zoe-Vonna Palmrose

University of Southern California

Susan Scholz

University of Kansas - Accounting and Information Systems Area

Date Written: August 2, 2006

Abstract

Research finds independent audit committees are generally effective in monitoring the financial reporting and auditing processes. However, not all audit committees that appear in form to be independent are in fact actually independent. CEO involvement in the board selection process can affect whether an audit committee substantively functions as an independent one. We use financial statement restatements to examine whether the benefits of having an independent audit committee are diminished, or even eliminated, when the CEO is involved in the selection of board members. Our results indicate that the monitoring benefits of having an independent audit committee are only realized when the CEO is not formally involved in selecting board members. Further, we find that these results appear to be driven by the more severe restatements, including misstatements in conjunction with fraudulent financial reporting. Thus, our evidence suggests that the diminishment in audit committee effectiveness with CEO involvement in selecting directors is associated with real economic costs to the firm. Finally, or results provide support for various SOX-related changes, which enhanced audit and nominating committee independence.

Keywords: Audit Committees, Nominating Committees, Corporate Governance

Suggested Citation

Carcello, Joseph V. and Neal, Terry L. and Palmrose, Zoe-Vonna and Scholz, Susan, CEO Involvement in Selecting Board Members and Audit Committee Effectiveness (August 2, 2006). Available at SSRN: https://ssrn.com/abstract=922301 or http://dx.doi.org/10.2139/ssrn.922301

Joseph V. Carcello

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

Terry L. Neal (Contact Author)

University of Tennessee ( email )

639 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-2664 (Phone)
865-974-4631 (Fax)

Zoe-Vonna Palmrose

University of Southern California ( email )

Marshall School of Business, 0441
Los Angeles, CA 90089-0441
United States
213-740-5019 (Phone)
213-747-2815 (Fax)

Susan Scholz

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)

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