Audit Committee Expertise: An Examination of the Post-SOX Era.

• In Event: Corporate Governance

Abstract

I examine whether accounting experts on the audit committee outperform other financial experts in monitoring financial reporting in the post-SOX era. Because SOX changed both audit committee composition and financial reporting quality, findings of the association between accounting expertise and financial reporting quality from the pre-SOX and SOX-implementation eras may not generalize to the period after SOX implementation. When assessing this possibility, I find that accounting experts, including former audit partners, fail to outperform other financial experts subsequent to SOX implementation. I further examine how the association between accounting expertise and financial reporting quality varies within expert type, based on when the expert was first appointed as an audit committee member. I find that pre-SOX appointment former audit partners are the only group consistently associated with higher financial reporting quality, suggesting that previously identified incremental associations have been diluted by more recently appointed experts. Taken broadly, the results suggest that regulation aimed at influencing audit committee composition and expertise has altered the previously documented relation. They also suggest that changing the definition of a financial expert to be more accounting-focused, as some investor advocates have recently requested, is unlikely to improve financial reporting quality.

Author

• Brandon Szerwo, University at Buffalo