Audit Committee Oversight of Fraud Risk: The Role of Social Ties and Governance Characteristics

• In Event: Monitoring and oversight
  In Paper Session: Monitoring and Oversight

Abstract

This study examines audit committee (AC) oversight of fraudulent financial reporting (FFR) risk and how such oversight varies with social ties and governance characteristics. Specifically, based on a survey of 134 U.S. public company AC members, we investigate how personal and professional ties between the AC member and the CEO and CFO, as well as other directors, influence AC members’ efforts to address FFR risk and assess management integrity. We find that AC members with personal ties to the CEO are less likely to engage in AC actions to assess FFR risk and management integrity. However, AC members with professional ties to other independent directors and those with professional experience as corporate controllers are more likely to engage in these actions. We find no evidence that professional ties to the CEO or CFO affect AC actions to assess FFR risk and management integrity. Further, we find that AC size is positively related to FFR risk assessment, while female AC members and individuals serving on boards with greater independence are more likely to report engaging in activities to assess management integrity. Collectively, these results suggest that personal ties to the CEO can be corrosive to corporate governance, while professional ties to other directors are associated with enhanced AC oversight processes.

Authors

• Robert M. Wilbanks, Tennessee Technological University

• Dana R. Hermanson, Kennesaw State University

• Vineeta D Sharma, Kennesaw State University