Audit committee financial expertise and internal control weakness: does CEO overconfidence matter?

Abstract

Purpose The presence of financial experts within audit committees (AC, hereafter) has been a central concern for regulatory bodies. These guidelines underscore the significance of having members with distinct financial acumen and proficiency on AC. The primary objective of this research is to explore the influence of financial expertise within AC on internal control weaknesses (ICWs, hereafter). Furthermore, another aim of this study is to examine the potential combined impact of CEO overconfidence on this correlation. Design/methodology/approach The statistical analysis has been done through the implementation of a multiple regression model by adopting a sample of 82 Jordanian companies, chosen from the years 2014 to 2020. Findings This research reveals that an AC with higher levels of financial expertise is linked to fewer ICWs. Upon further examination, this paper observes that this negative impact is primarily driven by the presence of accounting expertise, as opposed to nonaccounting expertise. It is also evident that CEOs with overconfidence may interfere with the decision-making processes of the audit committees, thus compromising the internal controls even though the committee is financially and accountancy literate. Originality/value This research distinguishes between accounting and nonaccounting financial experience in AC and shows that accounting experience significantly reduces internal control problems. In addition, it introduces CEO overconfidence as a moderating variable, which provides new insights into the field of corporate governance. The implications of these findings are far-reaching in enhancing transparency, trust and accountability by enhancing the quality of internal control.