Audit Committee Synergies

• In Event: Auditor Turnover, Governance, and Professional Skepticism

Abstract

This study examines whether companies with interlocking board committees – those with audit committee members additionally serving on the compensation and/or nominating committees – perform better or worse than companies with no interlocking committees. Audit committees are charged with the oversight of financial reporting disclosures and the auditor relationship. Compensation committees are responsible for setting appropriate executive/board compensation and overseeing company benefit plans. In addition to nominating high quality members to serve on the board, the nominating committee oversees all matters of a board’s corporate governance. Because interlocking boards create costs (such as reduced independence for each committee and additional time commitment for members of multiple committees) and benefits (improved communication and efficient coordination), it is an empirical question whether audit committee members with interlocking board relationships perform better or for worse. Using a sample of companies over the years 2000 to 2010, results indicate that interlocking audit committee structures appear to be associated with better financial reporting quality and internal control quality. Further analysis indicates that the synergies between the audit and compensation committees are associated with fewer restatements and internal control material weaknesses (ICMW) and synergies between the audit and nominating committees are associated with better accrual quality.

Authors

• Kathleen Hertz Rupley, Portland State University

• Yuan Xie, Fordham University

• Yang Xu, University of Colorado-Colorado Springs