Accounting Expertise of Board Committees and the Consequences of Financial Restatements

• In Event: Board Characteristics

Abstract

This paper examines the impact of accounting expertise of the audit and compensation committees on the consequences of financial restatements. We analyze both the short-term consequences – stock market reactions surrounding restatement announcements, and long-term consequences – the incidence of SEC Accounting and Auditing Enforcement Action (AAER) and CEO turnover after restatements. Using a sample of restatement firms from 1997 to 2005, we find that audit committee accounting expertise moderates the consequences of restatements, resulting in less negative stock market reactions and a lower probability of AAER. In contrast, the audit committee’s non-accounting financial expertise worsens the market reaction to restatement announcements and is positively related to AAER occurrences and CEO turnover. In addition, we find that compensation committee accounting expertise mitigates negative market reactions and the probability of CEO turnover. In contrast, compensation committees’ non-accounting financial expertise worsens negative stock returns around restatement announcements and increases the probability of AAER and CEO turnover after restatements. Overall, our results suggest that accounting expertise of board committees is a positive influence in mitigating the consequences of restatements.

Authors

• Somnath Das, University of Illinois at Chicago

• Jianxin Gong, Cal State University - Fullerton

• Siyi Li, University of Illinois at Chicago