Audit committee diversity and financial restatements

Abstract

Prior research has found that characteristics of the audit committee influence the incidence of financial restatements, as does demographic diversity on boards of directors. We draw upon work team diversity research to examine the impact of relations-oriented and task-oriented diversity in the audit committee on the likelihood of fraud-related and error-related financial restatements, respectively. We argue that these two types of demographic diversity work differently through greater vigilance of the audit committee in reducing the occurrence of financial restatements. Using a matched sample of fraud-restatement, error-restatement and non-restatement U.S. firms between 1996 and 2010, we find that relations-oriented diversity is associated with a lower incidence of fraud-related restatements, while task-oriented diversity is associated with a lower likelihood of error-related restatements. We also find that the involvement of audit committee members on other board committees moderates these relationships. We discuss the important role of work team diversity mechanisms in evaluating the effectiveness of board audit committees.