Audit Committee Member Contextual Experiences and Financial Reporting Outcomes

Shepardson, Marcy L.

doi:10.2139/ssrn.2221366

Cited by 6 publications

(3 citation statements)

References 59 publications

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“…Therefore, we hypothesize that board members' experience influences their ability to assess the assumptions and valuation techniques of the 111 Discretionary goodwill impairment losses goodwill impairment test. This hypothesis is consistent with the findings of Shepardson (2013), which imply that more-experienced audit committee members are better able to monitor the application of accounting standards and to constrain earnings management. Building on this result, we expect board members' experience (BOARDEXP) to be negatively associated with both positive and negative discretionary goodwill impairment losses:…”

Section: Governance Mechanismssupporting

confidence: 88%

Discretionary goodwill impairment losses in Europe

Gros

Koch

2019

JAAR

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Purpose The impairment-only approach to goodwill has regularly been criticized for offering too much discretion to managers and facilitating the manipulation of goodwill impairment losses. Extant research provides mixed results on whether managers exploit their inherent discretion informatively or opportunistically. The purpose of this paper is to examine the determinants of discretionary goodwill impairment losses in Europe. Design/methodology/approach The authors divide goodwill impairment losses into economically induced and discretionary parts. Thereafter, the authors examine the determinants of discretionary goodwill impairments. Findings The results indicate that discretionary goodwill impairment losses are used opportunistically rather than informatively. The authors find that managers exploit their discretion to “clear the deck” and to meet or beat analysts’ forecasts. However, the opportunistic behavior is constrained by corporate governance and enforcement mechanisms. Research limitations/implications The findings contribute to the current discussion on the suitability of the impairment-only approach by introducing inferences on how areas of discretion inherent in goodwill impairment testing are associated with management incentives and governance mechanisms in a European setting. Practical implications The results offer enforcers and standard-setters important insights into how mangers exploit discretion in goodwill accounting. These insights can help to identify firms that are likely to infringe upon the applicable accounting standards. Originality/value In contrast to prior research, the authors analyze the association among management incentives, governance mechanisms and discretionary goodwill impairment losses rather than the association with total or expected goodwill impairment losses. Moreover, to the best of authors’ knowledge, there is little empirical evidence based on a European (IAS 36) setting.

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Section: Governance Mechanismssupporting

confidence: 88%

Discretionary goodwill impairment losses in Europe

Gros

Koch

2019

JAAR

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“…Major components of financial reporting are relatively inflexible (Ball et al, 2000) and allow for little discretion. In fact, when experiences obtained through audit committee interlocks affect the financial reporting practices of interlocked firms (as appears to be the case; Shepardson, 2013), the consequences may well be undesirable: Brown (2011) has provided evidence of widespread diffusion of aggressive tax sheltering practices among interlocked firms. Audit committee interlocks are associated with the transfer of accounting policy choices with relation to negative special items.…”

Section: Audit Committee Interlocks and Firm Performance In Indian Firmsmentioning

confidence: 99%

Connecting the right knots: The impact of board committee interlocks on the performance of Indian firms

Edacherian

Richter

Karna

et al. 2023

Corporate Governance

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Research Question/IssueInformation processing, agency, and resource dependence perspectives provide diverging predictions regarding the relationship between board interlocks and firm performance, which are rooted in different perspectives on the roles of boards of directors. This study argues that these various approaches are reconcilable when considering the nature of board committees to which the interlocked directors are assigned.Research Findings/InsightsWe test our hypotheses on a sample of 5133 firm‐year observations in India. Our analyses support our hypotheses. The results show that interlocks between audit committees, whose primary function relates to providing financial oversight and ensuring compliance, are negatively related to firm performance. In contrast, interlocks between nomination and remuneration committees of Indian firms, which provide them with access to resources such as human capital and information on appropriate incentive structures, are positively related to performance.Theoretical/Academic ImplicationsOur study clarifies the relationship between board committee interlocks and firm performance by taking a multi‐theoretical perspective. Our analysis suggests that information processing, agency, and resource dependence theories complement one another in explaining the effect of interlocks on firm performance.Practitioner/Policy ImplicationsOur results show that it is not board interlocks per se that are detrimental to firm performance; in fact, appointing well‐connected directors with experience in serving on other boards might be beneficial for firms. However, firms should not assign specific monitoring‐intensive tasks such as auditing to directors who also serve on other firms' audit committees. Our findings suggest that these directors should have greater independence and focus.

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“…Most studies of opportunistic discretionary choice regarding goodwill impairment analyse how incentives may lead to opportunism; only a few studies include (in addition to incentives) factors that allow discretion -the number of CGUs (using FAS: Beatty & Weber, 2006;Lapointe-Antunes et al, 2008;Ramanna & Watts, 2011; the use of IFRS: Verriest & Gaeremynck, 2009) and the proportion of unverifiable net assets (Ramanna & Watts, 2011;Shepardson, 2011). Factors that allow discretion derive from the characteristics of accounting standards.…”

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confidence: 99%