Audit Committee Members and Restatement-Related Litigation Risk

Abstract

This study investigates factors associated with restatement-related litigation against U.S. audit committee members. Using a sample of restatement-related litigation in the U.S. over the period 1999-2012, we find that the likelihood of audit committee litigation is higher in the post-SOX time period when financial reporting and auditor oversight responsibilities were significantly increased. This finding suggests that increased legal liability post-SOX could reduce the pool of qualified candidates willing to serve on the audit committee. We find that directors serving on the audit committee for a longer portion of the class action period and those with net insider selling activity during the class action period are more likely to be named as defendants. However, audit committee chairs, financial experts, and audit committee members serving on the compensation committee are no more likely to be named as defendants than other audit committee members, contrary to the perceptions of many officers and directors. Overall, our study provides insights into when audit committee members face higher litigation risk and useful information for the recruitment and retention of audit committee members.