Audit committee accounting expertise and changes in financial reporting quality
Rich, Kevin T.
In this dissertation,I examine whether financial reporting quality increases following the appointment of an accounting expert to the audit committee. Prior literature documents positive cross-sectional associations between maintaining an accounting expert on the audit committee and financial reporting quality. Although this suggests that accounting expertise enhances the quality of a firm's financial reports, it is unclear whether financial reporting quality improves after appointing an accounting expert. Additionally, I explore how the strength of alternative governance provisions and the current expertise of the audit committee influence relations between appointing an accounting expert and changes in financial reporting quality. I hypothesize that accounting experts possess the financial backgrounds needed to detect accounting manipulations and the reputational capital to warrant actions that limit exposure to financial reporting failures. Therefore, I predict that newly appointed accounting experts have the ability and incentive to strengthen financial reporting systems and increase the quality of financial reports. Furthermore, I predict that incremental improvements in reporting quality following the appointment of an accounting expert are larger for strong governance firms because they possess the infrastructure necessary to act on audit committee recommendations and for firms with no prior accounting expertise because of opportunities for new accounting critiques by financially minded individuals. I test these predictions on a sample of 1,590 audit committee appointments between 2003 and 2005. Overall, I do not find empirical evidence of a change in financial reporting quality following the appointment of an audit committee accounting expert. However, I find that firms with strong governance that appoint an accounting expert experience larger post-appointment improvements in reporting quality than do firms with weak governance, as highlighted by more income-decreasing discretionary accruals, larger increases in earnings response coefficients, and higher quality accruals. Additionally, my evidence suggests that strong governance firms appointing their first accounting expert increase their reporting quality following the appointment. Therefore, my results imply that accounting expertise complements other governance mechanisms involved in financial monitoring. Overall, I provide evidence regarding the audit committee's influence over financial reporting and the conditions associated with effective use of accounting expertise.