If the Audit Committee Speaks, Does the Board Listen? Interdependencies between the Audit Committee and the Rest of the Board

• In Event: Audit Committees and Internal Audit

Abstract

Following a series of accounting scandals, regulators have strengthened the compositional requirements of the audit committee. The SOX requirements have made the audit committee into a strong subgroup within the board as the audit committee significantly differs from the rest of the board in terms of its composition. We investigate whether the benefit of a distinct audit committee depends on the acceptance of the audit committee’s message by the rest of the board.

Using a large dataset of listed U.S. firms between 2008 and 2012, we find audit committee effectiveness to benefit from this distinct and strong subgroup identity, measured as the extent to which the composition of the audit committee differs from the rest of the board. However, we also find consistent evidence that the benefit is diminished when the rest of the board forms a cohesive group, which results in a larger likelihood of frictions between both board subgroups, i.e. the audit committee and the rest of the board, and lower audit committee effectiveness.

Understanding how the audit committee’s effectiveness is dependent on its position versus the rest of the board should be of interest to regulators and companies alike.

Authors

• ann gaeremynck, KULeuven

• Liesbeth Bruynseels, KU Leuven

• mathijs van peteghem, KULeuven