The Monitoring Effectiveness of Co-Opted Audit Committees

• In Event: CEOs and Monitoring Mechanisms

Abstract

In this paper, we investigate the impact of audit committee co-option on financial reporting quality. We adapt the Coles et al. (2010) measure of board co-option and calculate audit committee co-option as the proportion of audit committee members appointed to the board after the current Chief Executive Officer (CEO) took office. Because CEOs are often actively involved in the director nomination and selection process, we expect that higher levels of audit committee co-option will be associated with less effective monitoring, as evidenced by more financial statement misstatements and greater absolute discretionary accruals. Consistent with our expectations, we find a positive relation between audit committee co-option and misstatements as well as between audit committee co-option and absolute discretionary accruals. Our findings should be of interest to regulators, investors, and other stakeholders because we provide new evidence about how potential CEO influence on director nominations and audit committee appointments impacts the effectiveness of monitoring.

Authors

• Cory Alan Cassell, University of Arkansas

• Linda Ann Myers, University of Arkansas

• Lyle Roy Schmardebeck, University of Arkansas

• Jian Zhou, University of Hawaii at Manoa