Director Turnover Following Internal Control Material Weaknesses.

• In Event: GAAP, Accounting Numbers, and Stock Returns

Abstract

Our study examines the labor market impact of material weaknesses in internal controls on independent directors in light of the changes to the supply and demand for directors following Sarbanes-Oxley (SOX). We examine turnover of independent board members that do not serve on the audit committee as well as audit committee members following the disclosure of an internal control weakness. Using a sample of 211 firms that reported internal control weaknesses and a matched sample of 211 firms that do not, we find no evidence of a relationship between an internal control material weakness and non-audit committee turnover or audit committee turnover. Using the sample of internal control weakness firms, we compare turnover rates of non-audit committee members to those of audit committee members and find that audit committee members, who have a greater responsibility for internal controls and financial reporting quality but who also are in greater demand and reduced supply following SOX, experience lower turnover rates than non-audit committee members following an internal control weakness.

Authors

• Linda Hughen, Sacred Heart University

• Venkataraman M Iyer, University of North Carolina at Greensboro

• Ayalew A Lulseged, University of North Carolina-Greensboro