Audit Committee Oversight of Fraud Risk: The Role of Social Ties, Professional Ties, and Governance Characteristics

Abstract

SYNOPSIS This study examines audit committee (AC) oversight of fraudulent financial reporting (FFR) risk and management integrity, and how such oversight varies with AC social ties, professional ties, and governance characteristics. Specifically, based on a survey of 134 U.S. public company AC members, we find that AC participants with social ties (i.e., personal ties) to the CEO are negatively associated with AC actions to assess FFR risk and management integrity. Further, the AC appears to cut back on more observable FFR and MI actions when the responding AC member has a social tie to the CEO, consistent with socially connected ACs being reluctant to engage in observable monitoring actions that could jeopardize a social tie to the CEO. However, AC participants with professional ties to other independent directors and those with professional experience as corporate controllers are positively related to such actions. We also find that AC size is positively related to FFR risk assessment, while female AC participants and those serving on boards with greater independence are more likely to report engaging in AC activities to assess management integrity. Finally, when asked more broadly about who they rely on and who is responsible for assessing the risk of FFR, AC members mainly point to the external audit partner, CFO, and head of internal audit. We discuss implications and directions for future research.