Assignment 2 ACG6657

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The current issue and full text archive of this journal is available at www.emeraldinsight.com/0268-6902.htm

Characteristics of audit committee financial experts:

an empirical study

Characteristics of audit committee

Venkataraman M. Iyer Department of Accounting and Finance,

The University of North Carolina at Greensboro, Greensboro, North Carolina, USA

E. Michael Bamber J.M. Tull School of Accounting, The University of Georgia,

Athens, Georgia, USA, and

Jeremy Griffin Department of Accountancy, University of Notre Dame,

South Bend, Indiana, USA

Abstract Purpose – The purpose of this paper is to examine the characteristics and qualifications of audit committee financial experts. Specifically, the paper examines if the majority of the financial experts possess accounting or general management experience. Design/methodology/approach – The authors collected the data through survey and use cross tabulation (univariate) and logistic regression to analyze the data. Findings – The results show that accounting certification and audit committee experience are valued positively by the Board of Directors when designating an audit committee member as a financial expert. Prior experience as a CEO results in a lower probability of being designated as a financial expert. Research limitations/implications – Non-response bias may be a factor which should be considered. There are other factors such as stock exchange affiliation of the company that have not been included due to the anonymous nature of the survey. Practical implications – It provides useful information and benchmark to the Board of Directors with respect to the characteristics of designated audit committee financial experts. Originality/value – This is the first paper to examine the characteristics of audit committee financial experts through survey. The paper presents a richer array of factors compared to what is available in proxy statements. Audit committees, financial statement users, policy makers, and researchers will find the results interesting and useful.

Keywords Audit committees, Financial expert, Sarbanes-Oxley, Corporate governance, Auditing

Paper type Research paper

1. Introduction Section 407 of the Sarbanes-Oxley Act of 2002 (the “Act”) requires public companies to disclose whether or not they have at least one “financial expert” serving on their audit committees. Companies that do not have an audit committee financial expert serving on their audit committee must disclose that fact and explain why they have no such expert. The SEC noted that the term “financial” extends beyond accounting and auditing to other aspects of the company, such as its capital structure, valuation, risk analysis and

Managerial Auditing Journal Vol. 28 No. 1, 2013

pp. 65-78 q Emerald Group Publishing Limited

0268-6902 DOI 10.1108/02686901311282506

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capital-raising activities. The SEC chose the phrase “audit committee financial expert” because it more accurately reflects the characteristics particularly relevant to the functions of the audit committee oversight, such as expertise in accounting matters as well as an understanding of financial statements and the capacity to ask insightful questions to determine the completeness and accuracy of the company’s financial statements.

The Final Rules (Securities and Exchange Commission, 2003) define an “audit committee financial expert ” as a person with all of the five following attributes:

(1) an understanding of generally accepted accounting principles and financial statements;

(2) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;

(3) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities;

(4) an understanding of internal controls and procedures for financial reporting; and

(5) an understanding of audit committee functions.

Under the Final Rules, in order to qualify as an “audit committee financial expert” a person can acquire the above listed attributes through any one or more of the following:

. education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;

. experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;

. experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or

. other relevant experience.

The board of directors (BOD) of every company subject to the Final Rules is now required to determine whether or not it has at least one audit committee financial expert serving on its audit committee. The directors can conclude that a person is an audit committee financial expert based on “other relevant experience,” even if that person did not obtain the required attributes through one of the specific roles identified. If the board makes such a determination, it is required to briefly list that person’s experience. Given the ability of the BOD to designate an audit committee member as a financial expert based on a wide range of characteristics, it is important to examine the characteristics and qualifications of audit committee financial experts. Specifically, of interest is the role of financial experts’ experience and, in particular, the relative roles of accounting and auditing experience, general managerial experience, and prior BOD and audit committee experience. Similarly of interest is whether a prior relationship with the company influences designation as a financial expert, as it can influence appointment to the BOD.

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We conducted a survey of audit committee members of public companies in the USA that are subject to these SEC requirements, to obtain information about their qualifications and characteristics. The survey, which was conducted in 2009, resulted in 167 responses, of which 118 were from audit committee financial experts and 49 from audit committee members who were not designated as financial experts. To our knowledge, our study is the first to use a survey method to gather information about audit committee financial experts. We also use the information to construct a logistic regression model to predict the factors related to the probability of an audit committee member being designated as a financial expert.

In contrast to prior studies (Carcello et al., 2002, 2006) that use publicly available information about designated financial experts, we examine a richer array of survey data to list the characteristics and qualifications preferred by the BOD to designate an audit committee member as a financial expert. While prior studies examine the qualifications of designated financial experts listed in the proxy statements, our sample includes all the audit committee members who are qualified to be a financial expert. This unique dataset enables us to provide the characteristics of a more desirable audit committee financial expert. Specifically, we examine if the BOD prefers certain qualifications over others in a financial expert. Contrary to the findings by Carcello et al. (2002) that accounting or financial management experience is the definition used by most companies for financial expertise, we find that professional accounting certification is considered more valuable by companies when designating a financial expert. This may be due to the impact of Sarbanes-Oxley Act (2002) and the related SEC requirements.

The rest of the paper is organized as follows. The next section presents a brief discussion of the prior research pertaining to the importance of audit committee financial experts. Research method including the description of the sample is given next. We continue with the results of the univariate and regression analyses of audit committee member characteristics that are associated with the designation of financial experts. The conclusion summarizes our findings, discusses the paper’s limitations, and identifies possible directions for future research.

2. Prior research Recent research has focused on the impact of audit committee financial experts on various factors such as corporate governance, internal control weaknesses, restatements and market reaction to the appointment. For example, Defond et al. (2005) find a positive market reaction to the appointment of financial experts having accounting skills to audit committees but no market reaction to the appointment of financial experts who have broader financial skills but no specific accounting skills.

Zhang et al. (2007) find that internal control weaknesses are related to a company’s audit committee having less financial expertise or, more specifically, having less accounting financial expertise and non-accounting financial expertise. Bedard et al. (2004), Krishnan (2005) and Dhaliwal et al. (2006) report that financial expertise, measured using a strict definition based on accounting/auditing experience, is associated with less earnings management and better internal control. On the other hand, Anderson et al. (2004) do not find any relation between debt costs and financial experts serving on the audit committee. They attribute this to the fact that the creditors focus on audit committee independence and not necessarily on its expertise.

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Carcello et al. (2006) examined the disclosures related to audit committee financial experts in the first year that this disclosure requirement was in effect. They found that virtually all companies disclose if there is a financial expert on the audit committee but the disclosure regarding his or her qualification was limited. They also found that most financial experts did not have a background in accounting or finance and the stock exchange affiliation moderated this factor. Carcello et al. (2002) studied the disclosures in audit committee charters and reports by examining a random sample of 150 proxy statements filed in 2001, prior to the SEC rules requiring designation of financial experts in audit committees. They found that most companies define “financial expertise” as having accounting or related financial management expertise. Professional certification or employment experience in accounting was less commonly employed definition of financial expertise.

Qualifications and characteristics of the financial experts thus impact various outcomes such as control weaknesses, restatements, earnings management, etc. Most of the prior studies obtain information about the financial experts from the disclosures made by companies in their proxy statements. On the other hand, our study uses a survey instrument to gather information from the audit committee members. Some information such as prior relationship of the audit committee member with someone on the management team can only be obtained using survey. To that extent, our research is different and provides a richer array of information about the financial experts. This is a purely descriptive study as our goal is to find the characteristics and qualifications deemed important in a financial expert by the BOD. Accordingly, we pose our research question:

RQ1. What characteristics and qualifications distinguish an audit committee financial expert from an audit committee member who has not been designated as a financial expert?

3. Research method 3.1 Sample We collected our data on the characteristics of audit committee financial experts through a survey. A survey instrument was mailed to 1,000 audit committee members in the fall of 2009. Their names were selected randomly from OneSource Global, a database comprising of audit committee members in public companies in the USA, and only one audit committee member was selected from each company. We received responses from 167 audit committee members for a response rate of 16.7 percent[1]. The two-page survey instrument contained questions seeking to obtain information on the characteristics and background of audit committee members[2].

3.2 Analysis We use univariate and multivariate tests to analyze the data. Specifically, we examine if there are any specific characteristics that distinguish a designated financial expert from an audit committee member who is not so designated by the companies. We also performed logistic regression analysis to find the factors related to an audit committee member being designated as a financial expert. Logistic regression is appropriate when the dependent variable is dichotomous, e.g. if an audit committee member is designated as a financial expert or not.

Our choice of independent variables is based on the qualifications listed by the SEC for an audit committee financial expert. These qualifications include accounting or auditing knowledge and experience as a CEO of a company. The SEC’s requirements

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are quite broad and it even includes a category “other relevant experience” which Characteristics of audit committee provides latitude for the BOD to consider qualifications other than the ones that are

listed. Given the exploratory nature of this study, we use a broad array of qualifications and characteristics that might be used by the BOD to designate an audit committee financial expert. For example, a company may consider experience serving on other audit committees and on other BODs to be “relevant experience”. Moreover, the BOD may use certain qualifications such as prior professional or informal relationship when choosing between two equally qualified audit committee members.

Our logistic regression model and the variables used are given below:

Fin Exp ¼ b0 þ b1 Other AC þ b2 Other Comm þ b3 Prior Mgr Exp þ b4 Prior BOD Exp þ b5 Prior Prof Rel þ b6 Prior Inf Rel þ b7 More than one BOD þ b8 Senior Mgmt þ b9 Certification þ b10 Audit Exp þ b11 Prior AC Exp þ b12 CEO Exp þ e

where:

Fin Exp ¼ 1 if the respondent is designated as a financial expert, else 0.

Other AC ¼ 1 if the respondent is serving on the audit committee of more than one company, else 0.

Other Comm ¼ 1 if the respondent is serving on any other committees of the board, else 0.

Prior Mgr Exp ¼ 1 if the respondent has a prior experience in the company’s industry in a management position, else 0.

Prior BOD Exp ¼ 1 if the respondent has a prior experience as an independent board member, else 0.

Prior Prof Rel ¼ 1 if the respondent has a prior professional relationship with any member of the management, else 0.

Prior Inf Rel ¼ 1 if the respondent has a prior informal relationship with any member of the management, else 0.

More than ¼ 1 if the respondent is currently serving on the board of more than one company, one BOD else 0.

Senior Mgmt ¼ 1 if the respondent is currently serving in a senior management position, else 0.

Certification ¼ 1 if the respondent has a CPA, CMA, or CIA certification, else 0.

Audit Exp ¼ 1 if the respondent has auditing experience, else 0.

Prior AC Exp ¼ 1 if the respondent has a prior audit committee experience, else 0.

CEO Exp ¼ 1 if the respondent has been a CEO of a company, else 0.

4. Results 4.1 Distribution of responses Figure 1 shows the distribution of responses among the sample companies. The overall response rate is 16.7 percent. The responses are approximately uniformly distributed

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Figure 1. Distribution of responses among sample companies

Note: Revenue is measured in $ million

among various size organizations measured using revenues, with the highest percentage of responses (9.5 percent) from organizations with the revenue of approximately $1 billion. The average size of the companies was $3.13 billion and the standard deviation was $11.5 billion.

4.2 Descriptive results Table I provides descriptive statistics about the audit committee members. It shows that a majority of audit committee members are serving concurrently on other audit committees, other BODs, and on other committees of the BOD, and have prior experience as a BOD member and as an audit committee member. Approximately 53 percent of the respondents have CPA, CMA, or CIA certification and 54 percent have prior auditing experience. Close to 36 percent of the audit committee members have a prior informal relationship with a member of the management and 30 percent have a prior professional relationship. About 70 percent of the respondents have been designated as financial experts. Exactly half the audit committee members have prior experience as a CEO of an organization.

Table II provides additional information about the audit committee members who responded to the survey. An overwhelming majority of respondents were male (.80 percent) and the average age of respondents was 62. They served on the audit committee on an average of about six years and on the BOD for about seven and a half years.

Table III provides descriptive statistics about the financial experts on the audit committee. It shows that a majority of the financial experts are serving concurrently on

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Characteristics of audit committee Variable Legend No Yes Missing Total

Currently serving on other audit committees Other AC 69 92 6 167 Currently serving on other committees of the Other committees 28 139 0 167 board Prior experience as manager in the industry Prior Mgr Exp 118 49 0 167 Prior experience as independent BOD member Prior Exp on BOD 56 111 0 167 Prior professional relationship with the Prior Prof Rel 115 51 1 167 management Prior informal relationship with the Prior Inf Rel 98 57 12 167 management Financial expert Fin Exp 49 118 167 Serving on more than one BOD More than one 41 125 1 167

BOD Currently in a senior management position Senior Mgmt 102 57 8 167 Certification (CPA, CMA, or CIA) Certification 79 88 167 Audit experience Audit Exp 72 90 5 167 Prior audit committee experience Prior AC Exp 46 120 1 167 Ever been a CEO CEO Exp 82 83 2 167 Table I. Gender 152 14 1 Descriptive statistics of

(male) (female) audit committee members

Variable n Mean SD Min Max

Company revenues ($ millions) 158 3,129.36 11,520.96 1 100,000 Table II. Years on AC 166 6.21 5.17 1 35 Descriptive statistics of Years on BOD 164 7.43 6.24 1 35 companies and audit Age 135 62.80 8.98 41 99 committee members

Variable Legend No Yes Missing Total

Currently serving on other audit committees Other AC 43 70 5 118 Currently serving on other committees of the Other committees 22 96 0 118 board Prior experience as manager in the industry Prior Mgr Exp 84 34 0 118 Prior experience as independent BOD member Prior Exp on BOD 39 79 0 118 Prior professional relationship with the Prior Prof Rel 76 42 0 118 management Prior informal relationship with the Prior Inf Rel 72 38 8 118 management Serving on more than one BOD More than one 23 95 0 118

BOD Currently in a senior management position Senior Mgmt 73 38 7 118 Certification (CPA, CMA, or CIA) Certification 43 75 0 118 Audit experience Audit Exp 42 73 3 118 Prior audit committee experience Prior AC Exp 27 91 0 118 Table III. Ever been a CEO CEO Exp 66 51 1 118 Descriptive statistics of Gender 108 10 financial experts on the

(male) (female) audit committee

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other audit committees, other BODs, and on other committees of the BOD, and have prior experience as a BOD member and as an audit committee member. About 63 percent of the financial experts have a professional accounting certification and about 62 percent have prior auditing experience. Approximately 32 percent of the financial experts have a prior informal relationship with a member of the management and 35 percent have a prior professional relationship. Only about 32 percent of the financial experts are currently employed in a senior management position. Less than half (42 percent) of the financial experts have prior experience as CEOs of organizations.

Table IV provides information about the designated financial experts on the audit committee. Among the financial experts who responded to the question, 107 were males and only ten were females[3]. The average age of the respondents was 62. They served on the audit committee on an average of about six years and on the BOD for about six and a half years.

It is important to know the characteristics and qualifications of audit committee members not designated as financial experts, to ascertain if they are indeed qualified to be designated as financial experts. Table V provides descriptive statistics about the audit committee members not designated as financial experts. It shows that a majority of the members in this group are serving on other committees of the Board, other BODs, and have prior experience as a BOD member and as an audit committee member. As expected, only about 26 percent of them have a professional accounting certification

Variable n Mean SD Min Max

Table IV. Descriptive statistics of financial experts on the audit committee

Company revenues ($ millions) Years on AC Years on BOD Age

113 118 117 97

3,585.79 6.00 6.50 62.3

13,429.02 4.83 5.53 9.4

1 1 1 41

100,000 35 35 99

Variable Legend No Yes Missing Total

Currently serving on other audit committees Other AC 26 22 1 49 Currently serving on other committees of the Other committees 6 43 0 49 board Prior experience as manager in the industry Prior Mgr Exp 34 15 0 49 Prior experience as independent BOD member Prior Exp on BOD 17 32 0 49 Prior professional relationship with the Prior Prof Rel 39 9 1 49 management Prior informal relationship with the Prior Inf Rel 26 19 4 49 management Serving on more than one BOD More than one 18 31 0 49

BOD Currently in a senior management position Senior Mgmt 29 19 1 49 Certification (CPA, CMA, or CIA) Certification 36 13 0 49

Table V. Audit experience Audit Exp 30 17 2 49 Descriptive statistics of Prior audit committee experience Prior AC Exp 19 29 1 49 audit committee members Ever been a CEO CEO Exp 16 32 1 49 not designated as Gender 44 4 1 financial experts (male) (female)

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and about 35percent have prior auditing experience. Approximately 39 percent of the respondents in this group have a prior informal relationship with a member of the management and 18 percent have a prior professional relationship. Only 39 percent of the members are currently employed in a senior management position and more than half (65 percent) have prior experience as CEOs of organizations.

Table VI provides additional information about the members not designated as financial experts on the audit committee. Among those who responded to the question, 44 were males and only four were females. The average age of the respondents was 64. They served on the audit committee on an average of about six years and on the BOD for about nine and a half years. There was no significant difference between the size of the companies of the financial experts and the companies of other audit committee members.

A further analysis of this group of audit committee members shows that seven members did not possess the accounting knowledge (certification or auditing experience) or background as a CEO of a company which would meet the requirement to be designated as a financial expert.

4.3 Cross tabulation results Table VII provides the results of the cross tabulation analysis. Cross tabulation shows the joint distribution of two or more variables and can be used to examine the relationships between the variables. x 2 statistics is used to determine if the relationship between the variables is significant.

Characteristics of audit committee

Variable n Mean SD Min Max Table VI.

Company revenues ($ millions) 45 1,983.22 3,562.59 0 18,000 Descriptive statistics of Years on AC 48 6.708 5.95 1 33 audit committee members Years on BOD 47 9.745 7.31 1 33 not designated as Age 38 64.1 7.79 48 86 financial experts

Expected number of financial Actual number of financial x 2

Variable expertsb experts p-valuea

Other AC 64.6 70 0.059 Other Committees 98.2 96 0.313 Prior Mgr Exp 34.6 34 0.816 Prior Exp on BOD 78.4 79 0.838 Prior Prof Rel 36.3 42 0.033 Prior Inf Rel 40.5 38 0.368 More than one BOD 89 95 0.018 Senior Mgmt 39.8 38 0.518 Certification 62 75 0.000 Audit Exp 63.9 73 0.002 Prior AC Exp 85.3 91 0.029 CEO Exp 58.9 51 0.007

Notes: a x 2 p-values are calculated using two-tail tests; bexpected value in a cross tabulation is the number of objects one would expect to find after multiplying the probabilities of the row and the column in the table

Table VII. Cross tabulation of

financial expert with other variables

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Our results show that designation of financial expert is significantly related to a variety of experiences and current activities. Having a professional accounting certification and auditing experience are positively associated with financial expert designation, so is prior audit committee experience. CEO experience is a factor in appointment to a BOD, and approximately half of our financial experts have this experience, but it is negatively associated with designation of financial expert. While the majority of audit committee members currently serve on other BOD and audit committees, audit committee members designated financial experts are even more likely to currently serve on other BODs and audit committees.

4.4 Regression results Cross tabulation examines each variable at a time. Hence logistic regression is used to determine the impact of each variable in the presence of other variables. As explained before, of the 167 respondents, 160 were deemed to have the necessary qualifications to be designated as financial experts. Hence, we use only these 160 cases in our analysis. Results of the logistic regression are given in Table VIII. These results are discussed in the following paragraphs.

The regression model is significant ( p , 0.001) with a pseudo R 2 of 0.40. It has a classification accuracy of 82.1 percent. Table VIII shows that the following factors are significantly related to the probability of an audit committee member being designated as a financial expert:

. currently serving on other audit committees ( p ¼ 0.072);

. prior experience on BOD ( p ¼ 0.029); and

. CPA, CMA, or CIA Certification ( p ¼ 0.074), and prior CEO experience ( p ¼ 0.002).

Dependent variable Financial experts Parameter Coeff. Exp(B) (odds ratio) Wald x 2 P a

Intercept 1.822 6.186 1.56 0.211 Other AC 21.277 0.279 3.23 0.072 Other Committees 0.222 1.249 0.08 0.783 Prior Mgr Exp 0.423 1.526 0.49 0.482 Prior Exp on BOD 1.902 6.702 4.76 0.029 Prior Prof Rel 20.979 0.376 1.67 0.196 Prior Inf Rel 0.448 1.565 0.58 0.445 More than one BOD 0.229 1.257 0.11 0.738 Senior Mgmt 20.470 0.625 0.60 0.437 Certification 21.089 0.337 3.19 0.074 Audit Exp 20.633 0.531 1.00 0.317 Prior AC Exp 20.419 0.658 0.30 0.582 CEO Exp 2.150 8.584 9.74 0.002 Ln Revenue 0.028 1.029 0.04 0.845 x 2 ¼ 38.47

Table VIII. p ¼ 0.000 Logistic regression model Classification for factors related to audit accuracy ¼ 82.1% committee members Nagelkerke R 2 ¼ 0.40 designated as financial experts Note: a p-values for independent variables are calculated using two-tail tests

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The table also reports the odds ratio (Exp (B)) which is the natural log base, e, to the exponent, b, where b ¼ the parameter estimate. When b ¼ 0, Exp(b) ¼ 1, so therefore an odds ratio of 1 corresponds to an explanatory variable, which does not affect the dependent variable. An Exp(b) . 1 means the independent variable increases the logit and therefore increases odds(event). If Exp(b) is less than 1.0, then the independent variable decreases the logit and decreases odds(event). In binary logistic regression, the higher category of the dependent (1 – financial expert) is predicted and the lower category (0 – not a financial expert) is the comparison reference by default. Also, when there are categorical independent variables (e.g. having a professional certification or not), the prediction is for the lower category and the higher category (professional certification ¼ 1) is the reference. Hence, for certification, we can say that the odds of being designated as a financial expert are decreased by a factor of 0.337 by not having a professional certification[4].

Results show that the factors that improve the odds of being designated as a financial expert are largely consistent with the earlier cross tabulation results. A professional accounting certification and serving on other audit committees increase the odds of being designated a financial expert. However, prior experience on BOD joins prior CEO experience in decreasing the odds of being designated as a financial expert.

5. Conclusions To our knowledge, this is the first study which uses a survey method to gather data from the audit committee members to examine the characteristics of designated financial experts. We present the results of the responses received from audit committee members in 167 companies.

Our results show that professional accounting certification and audit committee experience are valued positively by the BOD when designating an audit committee member as a financial expert. Prior experience as a CEO results in a lower probability of being designated as a financial expert. These results are positive findings given that prior research shows that accounting knowledge and audit experience are valuable and they result in less earnings management and better internal control. Our results do not support the finding of Carcello et al. (2002) that the financial experts designated by the companies typically do not possess an accounting or finance background but have experience serving as a CEO. The different results are likely due to the Sarbanes-Oxley Act. While many of our designated financial experts have experience serving as a CEO, this is a typical characteristic of BOD members but it does not increase the chance of being designated a financial expert. Rather, a financial expert designation is significantly improved with a professional accounting certification and audit committee experience. Contrary to assertions in the popular press, a prior informal or professional relationship with members of the management team does not seem to influence the designation as a financial expert. We do not find significant differences in age or experience levels between the financial experts and other members of the audit committee.

There are several limitations to our study. Caution is required when interpreting results due to the limitations associated with administering the materials by mail. Non-response bias is a factor which should be considered. There are other factors such as stock exchange affiliation of the company may impact the characteristics of financial experts (Carcello et al., 2006). Given the anonymous nature of the survey,

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we were unable to supplement publicly available information with the information provided by the respondents.

Future studies may examine the process the companies use to choose the financial expert to serve on the audit committee. Studies have typically used the accounting/non-accounting background of financial experts to examine the outcomes such as internal control weaknesses, fraud, etc. Another avenue for future research is to use a richer set of characteristics such as CEO experience, audit experience, etc. of financial experts to examine these outcomes.

Notes

1. Most of these responses were received after our first mailing. We did send out a reminder and a copy of the survey to the non-respondents but there were only 18 responses to our second mailing.

2. Relevant questions from the questionnaire are provided in the Appendix.

3. The proportion of males and females in the sample is similar to the proportion of males and females in the population surveyed.

4. The results are similar even if we use just the CPA certification instead of CPA, CMA, or CIA certification. About 68 audit committee members had CPA certification out of which 62 were designated as financial experts.

References

Anderson, R.C., Mansi, S.A. and Reeb, D.M. (2004), “Board characteristics, accounting report integrity, and the cost of debt”, Journal of Accounting and Economics, Vol. 37 No. 2, pp. 315-42.

Bedard, J., Chtourou, S.M. and Courteau, L. (2004), “The effect of audit committee expertise, independence, and activity on aggressive earnings management”, Auditing: A Journal of Practice & Theory, Vol. 23 No. 2, pp. 13-35.

Carcello, J.V., Hermanson, D.R. and Neal, T.L. (2002), “Disclosures in audit committee charters and reports”, Accounting Horizons, Vol. 16 No. 4, pp. 291-304.

Carcello, J.V., Hollingsworth, C.W. and Neal, T.L. (2006), “Audit committee financial experts: a closer examination using firm designations”, Accounting Horizons, Vol. 20 No. 4, pp. 351-73.

Defond, M.L., Hann, N. and Hu, X. (2005), “Does the market value financial expertise on audit committees of boards of directors?”, Journal of Accounting Research, Vol. 32, pp. 153-93.

Dhaliwal, D., Naiker, V. and Navissi, F. (2006), “Audit committee financial expertise, corporate governance and accruals quality: an empirical analysis”, working paper, University of Arizona, Tucson, AZ.

Krishnan, J. (2005), “Audit committee quality and internal control: an empirical analysis”, The Accounting Review, Vol. 80 No. 2, pp. 649-75.

Securities and Exchange Commission (2003), Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Government Printing Office, Washington, DC.

Zhang, Y., Zhou, J. and Zhou, N. (2007), “Audit committee quality, auditor independence, and internal control weaknesses”, Journal of Accounting & Public Policy, Vol. 26 No. 3, pp. 300-27.

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Further reading Characteristics of audit committee DeZoort, T. and Salterio, S. (2001), “The effects of corporate governance experience and financial

reporting and audit knowledge on audit committee members’ judgments”, Auditing: A Journal of Practice & Theory, Vol. 20 No. 2, pp. 31-47.

Appendix. Questionnaire

Are you currently on the audit committee of more than one company ? Yes No

Please answer the following questions pertaining to your relationship with the company that you serve as an audit committee member (use the largest company if serving on more than one):

1. How long have you been on the audit committee? Number of years _____

2. How long have you been on the BOD of this company? Number of years _____

3. Are you serving on any other committees of the board? Yes No

4. What is the approximate revenue of this company? ________________

5. Does this company have a Big 4 auditor? Yes No

Please answer the following questions:

1. Before being appointed to the board of directors, did you have prior experience in the company’s industry in a management position? Yes No

2. Before being appointed to the board of directors, did you have prior experience as an independent BOD member? Yes No

3. Did you have (a) a professional relationship with any members of this company’s management before serving on the BOD? Yes No

or (b) an informal relationship with any member of this company’s management before serving on the BOD? Yes No

4. Approximately how many days per year do you spend as an audit committee member on the company’s affairs? days

5. Are you deemed to be the financial expert on the audit committee? Yes No

6. Do you currently serve on more than one company’s BOD? Yes No

7. Other than your work as a BOD member, which of the following best describes your current employment status?

Employed (full-time) Employed (part-time) Retired Other _______________

Are you currently serving in a senior management position ? Yes No

8a. Gender: Male Female 8b. Age years

9. Do you have any accounting certification? CPA CMA CIA Other _____________

10. Do you have any auditing experience? Yes No

11. Do you have any prior audit committee experience (in another company)? Yes No

12. Were you ever a CEO? Yes No

Thank you

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About the authors Venkataraman M. Iyer is a Professor. His research has appeared in several journals including Accounting, Organizations, and Society; Auditing: A Journal of Practice and Theory; and Managerial Auditing Journal. Venkataraman M. Iyer is the corresponding author and can be contacted at: [email protected]

E. Michael Bamber is Harold M. Heckman Chair of Public Accounting. He has published in many journals including The Accounting Review; Accounting, Organizations, and Society; and Auditing: A Journal of Practice and Theory.

Jeremy Griffin is an Assistant Professor. His research is in behavioral auditing.

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