Effects of individual task-specific experience in audit committee oversight of financial reporting outcomes

Abstract

Financial statement amounts are established by managers and verified by auditors, and reporting and audit processes are overseen by audit committees of individuals having varying levels of knowledge about and experience with specific financial reporting tasks. As such, understanding how monitoring decision inputs, such as individual task-specific experience, affect reporting outcomes is essential for understanding the monitoring ability of audit committees, particularly when tasks are complex. Grounded in behavioral theory and using archival data, I examine whether and how individual audit committee member task-specific experience affects group financial reporting outcomes and whether effects are consistent with contagion or conservatism. Using a sample matched on audit committee selection characteristics, I find audit committee task-specific experience is associated with goodwill write-off decisions and I find no incremental effect of task-specific experience of individuals with appointed or other high-status characteristics, consistent with task-specific experience itself elevating status in group decision making. Further, results support the conclusion that audit committee task-specific experience induces conservative outcomes, rather than contagion of decisions between firms. Results should be important for assessing the monitoring ability of audit committees, particularly when managerial incentives to bias earnings are present.