Affiliated Directors, Executive Turnover, and Accounting Irregularity Investigations

• In Event: Governance and Financial Reporting

Abstract

This study examines the decision by boards to hire outside advisors– such as law firms, forensic accountants, and consultants– to investigate accounting irregularities. Using new data on outside advisors and a small sample of 141 public firms with accounting irregularities, I find that firms with affiliated (i.e., “grey”) directors on their boards tend to hire outside advisors. The involvement of outside advisors increases the probability of turnover for both the CEO and CFO. My results indicate that (1) affiliated/grey directors lessen any bias towards the CEO by allowing outside advisors to lead the investigation (2) boards rely on outside advisors to mitigate deficiencies in monitoring executives.

Author

• Michelle Liu, New York Institute of Technology