The Association Between Audit Committee Overboarding, Audit Committee Responses, and Financial Reporting Quality in the Decade After SOX

• In Event: Board and Audit Committee Activity and Financial Reporting Quality

Abstract

The Sarbanes-Oxley Act (SOX) added a multitude of financial oversight responsibilities to the audit committees of public companies, leading to concerns amongst regulators and the investing community that audit committees that were overboarded with members serving on multiple other board seats would be unable to effectively monitor the companies they represented. I find that these concerns are undue. More overboarded audit committees have adequately adjusted to their increased workloads in the decade since SOX to such a degree that they have lower misstatement frequencies than less overboarded committees. By contracting in additional auditor effort or retaining higher quality auditors, overboarded audit committees have found responses that aid in their monitoring. These responses lead to positive financial reporting outcomes when audit committees accept the limitations imposed by being overboarded. Overall, I find that more overboarded audit committees are able to remain effective monitors of the financial reporting process.

Author

• John Kyle Castonguay, Hofstra University