The role of financial reporting quality in selecting new audit committee member

Abstract

AbstractIn this paper, we examine how the Boards of Directors affect their firm's financial reporting quality (FRQ) through the appointment of new Audit Committee Members (ACM) with a sample of firms from the period 2007 to 2011. Using the appointee firm's financial report quality as a proxy for new ACMs’ financial reporting attributes, we find that appointer firms are more likely to appoint new ACMs with financial reporting attributes similar to firms’ FRQ. We also show that firms appointing ACMs with relatively weak financial reporting attributes are more likely to have decreased subsequent FRQ. Further, we find that firms appointing ACMs with relatively weak financial reporting attributes suffer more deterioration on their subsequent FRQ when their financial reporting qualities are more different from the ACMs’ financial reporting attributes. For the appointment of board members not on the Audit Committee, we find no similarity of financial reporting quality between appointer firms and new directors.