Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Overlapping Membership on Audit and Compensation Committees and Financial Reporting Quality

Overlapping Membership on Audit and Compensation Committees and Financial Reporting Quality This paper examines whether the audit committee members of a board improve financial reporting quality if they are also on their organisation's compensation committee. Audit committees are responsible for overseeing the financial reporting process of organisations and have been urged to broaden their understanding of business risk and of the incentives provided by their firms’ executive compensation structures. Acknowledging the interrelationships among executive compensation, risk‐taking and financial reporting quality, members of audit and compensation committees have been advocating more information sharing between the two committees. Using archival data from a sample of Australian Stock Exchange listed companies, and discretionary accruals as a proxy for financial reporting quality, this study finds that firms with overlapping committees have better quality financial reporting than those without such an overlap. Our evidence for this is stronger in cases where managers tend to manage earnings upwards in order to meet or beat earnings benchmarks. We also find that the beneficial effect of the existence of overlapping committees is adversely affected by the equity holdings of directors with overlapping memberships. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Australian Accounting Review Wiley

Overlapping Membership on Audit and Compensation Committees and Financial Reporting Quality

Download PDF
15 pages

Loading next page...
 
/lp/wiley/overlapping-membership-on-audit-and-compensation-committees-and-75rTSNFTP4
Publisher
Wiley
Copyright
Copyright © 2016 CPA Australia Ltd (CPA Australia)
ISSN
1035-6908
eISSN
1835-2561
DOI
10.1111/auar.12086
Publisher site
See Article on Publisher Site

Abstract

This paper examines whether the audit committee members of a board improve financial reporting quality if they are also on their organisation's compensation committee. Audit committees are responsible for overseeing the financial reporting process of organisations and have been urged to broaden their understanding of business risk and of the incentives provided by their firms’ executive compensation structures. Acknowledging the interrelationships among executive compensation, risk‐taking and financial reporting quality, members of audit and compensation committees have been advocating more information sharing between the two committees. Using archival data from a sample of Australian Stock Exchange listed companies, and discretionary accruals as a proxy for financial reporting quality, this study finds that firms with overlapping committees have better quality financial reporting than those without such an overlap. Our evidence for this is stronger in cases where managers tend to manage earnings upwards in order to meet or beat earnings benchmarks. We also find that the beneficial effect of the existence of overlapping committees is adversely affected by the equity holdings of directors with overlapping memberships.

Journal

Australian Accounting Review – Wiley

Published: Mar 1, 2016

References

  • Audit Committee Characteristics and Restatements
    Abbott, Abbott; Parker, Parker; Peters, Peters
  • The Association between Audit Committee Characteristics and Audit Fees
    Abbott, Abbott; Parker, Parker; Peters, Peters; Raghunandan, Raghunandan
  • A Theory of Friendly Boards
    Adams, Adams; Ferreira, Ferreira
  • The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey
    Adams, Adams; Hermalin, Hermalin; Weisbach, Weisbach
  • An Empirical Examination of the Role of the CEO and the Compensation Committee in Structuring Executive Pay
    Anderson, Anderson; Bizjak, Bizjak
  • Audit Committee Incentive Compensation and Accounting Restatements
    Archambeault, Archambeault; Dezoort, Dezoort; Hermanson, Hermanson
  • The Balance Sheet as an Earnings Management Constraint
    Barton, Barton; Simko, Simko
  • Private Information, Earnings Manipulations, and Executive Stock‐option Exercises
    Bartov, Bartov; Mohanram, Mohanram
  • The Rewards to Meeting or Beating Earnings Expectations
    Bartov, Bartov; Givoly, Givoly; Hayn, Hayn
  • The Numbers Game: How Do Managers Compensated with Stock Options Meet Analysts’ Earnings Forecasts?
    Bauman, Bauman; Braswell, Braswell; Shaw, Shaw
  • Audit Committees and Earnings Quality
    Baxter, Baxter; Cotter, Cotter
  • Fraudulent Financial Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms
    Beasley, Beasley; Carcello, Carcello; Hermanson, Hermanson; Lapides, Lapides
  • The Effect of Audit Quality on Earnings Management
    Becker, Becker; DeFond, DeFond; Jiambalvo, Jiambalvo; Subramanyam, Subramanyam
  • Strengthening the Financial Reporting System: Can Audit Committees Deliver?
    Bédard, Bédard; Gendron, Gendron
  • The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management
    Bedard, Bedard; Chtourou, Chtourou; Courteau, Courteau
  • CEO Incentives and Earnings Management
    Bergstresser, Bergstresser; Philippon, Philippon
  • Audit Committee Performance: Ownership vs. Independence—Did SOX Get It Wrong?
    Bolton, Bolton
  • Are Fully Independent Audit Committees Really Necessary?
    Bronson, Bronson; Carcello, Carcello; Hollingsworth, Hollingsworth; Neal, Neal
  • A Temporal Analysis of Quarterly Earnings Thresholds: Propensities and Valuation Consequences
    Brown, Brown; Caylor, Caylor
  • Does Overlapping Membership on Audit and Compensation Committees Improve a Firm's Financial Reporting Quality?
    Chandar, Chandar; Chang, Chang; Zheng, Zheng
  • Equity Incentives and Earnings Management
    Cheng, Cheng; Warfield, Warfield
  • Errors in Estimating Accruals: Implications for Empirical Research
    Collins, Collins; Hribar, Hribar
  • Is Compensating Audit Committee Members with Stock Options Associated with the Likelihood of Internal Control Weaknesses?
    Cullinan, Cullinan; Du, Du; Jiang, Jiang
  • Meta‐analyses of Financial Performance and Equity: Fusion or Confusion?
    Dalton, Dalton; Daily, Daily; Certo, Certo; Roengpitya, Roengpitya
  • Internal Governance Structures and Earnings Management
    Davidson, Davidson; Goodwin‐Stewart, Goodwin‐Stewart; Kent, Kent
  • Why are Earnings Kinky? An Examination of the Earnings Management Explanation
    Dechow, Dechow; Richardson, Richardson; Tuna, Tuna
  • Debt Covenant Violation and Manipulation of Accruals
    DeFond, DeFond; Jiambalvo, Jiambalvo
  • Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature
    DeZoort, DeZoort; Hermanson, Hermanson; Archambeault, Archambeault; Reed, Reed
  • The Association between Accruals Quality and the Characteristics of Accounting Experts and Mix of Expertise on Audit Committees
    Dhaliwal, Dhaliwal; Naiker, Naiker; Navissi, Navissi
  • Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments
    Ferris, Ferris; Jagannathan, Jagannathan; Pritchard, Pritchard
  • Corporate Boards, Audit Committees, and Earnings Management: Pre‐ and Post‐SOX Evidence
    Ghosh, Ghosh; Marra, Marra; Moon, Moon
  • Audit Committees, Boards of Directors, and Remediation of Material Weaknesses in Internal Control
    Goh, Goh
  • The Economic Implications of Corporate Financial Reporting
    Graham, Graham; Harvey, Harvey; Rajgopal, Rajgopal
  • Target Shooting: Review of Earnings Management around Earnings Benchmarks
    Habib, Habib; Hansen, Hansen
  • Endogenously Chosen Boards of Directors and their Monitoring of the CEO
    Hermalin, Hermalin; Weisbach, Weisbach
  • Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
    Hermalin, Hermalin; Weisbach, Weisbach
  • The Compensation Committee Process
    Hermanson, Hermanson; Tompkins, Tompkins; Veliyath, Veliyath; Ye, Ye
  • Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives
    Hillman, Hillman; Dalziel, Dalziel
  • Errors in Estimating Accruals: Implications for Empirical Research
    Hribar, Hribar; Collins, Collins
  • Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
    Jensen, Jensen; Meckling, Meckling
  • Earnings Management during Import Relief Investigations
    Jones, Jones
  • Prospect Theory: An Analysis of Decisions under Risk
    Kahneman, Kahneman; Tversky, Tversky
  • Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices
    Kasznik, Kasznik; McNichols, McNichols
  • Directors’ Characteristics and Committee Membership: An Investigation of Type, Occupation, Tenure, and Gender
    Kesner, Kesner
  • Audit Committee, Board of Director Characteristics, and Earnings Management
    Klein, Klein
  • Performance Matched Discretionary Accrual Measures
    Kothari, Kothari; Leone, Leone; Wasley, Wasley
  • Does the SOX Definition of an Accounting Expert Matter?: The Association between Audit Committee Directors’ Accounting Expertise and Accounting Conservatism
    Krishnan, Krishnan; Visvanathan, Visvanathan
  • Board Committees, CEO Compensation, and Earnings Management
    Laux, Laux; Laux, Laux
  • On the Usefulness of Earnings and Earnings Research: Lessons and Directions from Two Decades of Empirical Research
    Lev, Lev
  • Common Membership and Effective Corporate Governance: Evidence from Audit and Compensation Committees
    Liao, Liao; Hsu, Hsu
  • Audit Committee Equity Holdings, the Risk of Reporting Problems, and the Achievement of Earnings Thresholds
    MacGregor, MacGregor
  • Are Independent Audit Committee Members Objective? Experimental Evidence
    Magilke, Magilke; Mayhew, Mayhew; Pike, Pike
  • Consequences of Overvalued Equity: Evidence from Earnings Manipulation
    Marciukaityte, Marciukaityte; Varma, Varma
  • The Effect of Missing a Quarterly Earnings Benchmark on the CEO's Annual Bonus
    Matsunaga, Matsunaga; Park, Park
  • Former Audit Partners and Abnormal Accruals
    Menon, Menon; Williams, Williams
  • Does the Composition of the Compensation Committee Influence CEO Compensation Practices?
    Newman, Newman; Mozes, Mozes
  • Information Costs and the Role of the Independent Corporate Director
    Nowak, Nowak; McCabe, McCabe
  • Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches
    Petersen, Petersen
  • Voluntary Audit Committee Characteristics, Incentives, and Aggressive Earnings Management: Evidence from New Zealand
    Sharma, Sharma; Kuang, Kuang
  • Compare and Contrast: Perspectives on Board Committees
    Spira, Spira; Bender, Bender
  • The Pricing of Discretionary Accruals
    Subramanyam, Subramanyam
  • The Effect of Compensation Committee Quality on the Association between CEO Cash Compensation and Accounting Performance
    Sun, Sun; Cahan, Cahan
  • Compensation Committee Governance Quality, Chief Executive Officer Stock Option Grants, and Future Firm Performance
    Sun, Sun; Cahan, Cahan; Emanuel, Emanuel
  • Audit Committees, Boards, and the Quality of Reported Earnings
    Vafeas, Vafeas
  • Earnings Management and Corporate Governance: The Role of the Board and the Audit Committee
    Xie, Xie; Davidson, Davidson; DaDalt, DaDalt
  • Audit Committees and Quarterly Earnings Management
    Yang, Yang; Krishnan, Krishnan
  • Staggered Boards and Earnings Management
    Zhao, Zhao; Chen, Chen
  • Compensation Committee Governance Quality, Chief Executive Officer Stock Option Grants, and Future Firm Performance
    Sun, J.; Cahan, S.; Emanuel, D.
  • Audit Committees, Boards, and the Quality of Reported Earnings
    Vafeas, N.
  • Positive Accounting Theory
    Watts, R.; Zimmerman, J.
  • Introductory Econometrics: A Modern Approach
    Wooldridge, J.
  • Earnings Management and Corporate Governance: The Role of the Board and the Audit Committee
    Xie, B.; Davidson, W.N.; DaDalt, P.J.
  • Audit Committees and Quarterly Earnings Management
    Yang, J.S.; Krishnan, J.
  • Staggered Boards and Earnings Management
    Zhao, Y.; Chen, K.H.