The Effects of Accounting Expertise of Board Committees on the Short- and Long-term Consequences of Financial Restatements

Abstract

Using financial restatements as the contextual setting, we examine whether the accounting expertise of board committees affects the consequences of financial reporting quality. We analyze both short-term consequences—stock market reactions surrounding restatement announcements, and long-term consequences—the incidence of SEC Accounting and Auditing Enforcement Actions (AAERs), and CEO and CFO turnover after restatements. Our results show that the presence of audit committee members with accounting expertise moderates the consequences of restatements, resulting in less negative stock market reactions and a lower probability of CEO turnover. In contrast, the audit committee’s non-accounting financial expertise increases the likelihood of AAERs. For the compensation committee, we find that accounting expertise reduces the probability of CEO turnover, while non-accounting financial expertise exacerbates the negative stock returns around restatement announcements and increases the probability of AAER. In the post Sarbanes Oxley Act (SOX) period, restatements have resulted in less severe consequences while companies have increased their propensity to hire accounting experts. on the board. Correspondingly, we document that the moderating effects of accounting expertise become less significant, in part because the moderating effects are offset by the changed investor expectations. Overall, our results suggest that accounting expertise of board committees helps mitigate the negative consequences of restatements.