Do overlapping audit and compensation committee memberships contribute to better financial reporting quality? Empirical evidence for the German two-tier system

Abstract

Strengthening audit committee effectiveness is a key challenge from a research, regulation and corporate practice perspective. Audit committees' monitoring role in financial reporting is of great importance for shareholders and other stakeholder groups. This empirical-quantitative study examines overlapping membership in the audit and compensation committees and its impact on financial reporting quality. The analysis covers a sample of German firms listed on the 'DAX', 'TecDAX' and 'MDAX' for the business years 2010-2016 (426 firm-year observations). Correlation and regression analyses were conducted to evaluate the link between two overlapping variables and financial reporting quality. While the first overlapping variable (proportion of audit committee members who also sit on the compensation committee) contributes positively to accrual quality (as financial reporting quality), no significant results were found for the second overlapping variable (the existence of an independent financial expert as an overlapping member). The main result holds for robustness checks and has major implications in the German two-tier system.

Busy audit committee directors and corporate narrative disclosure in Oman

“…The findings of H1 are in line with agency theory and the results of previous studies (Chandar et al , 2012; Habib and Bhuiyan, 2016; Kalelkar, 2017; Velte, 2017; Al Lawati and Hussainey, 2020), which find that overlapping directorship improves FRQ. According to Laux and Laux’s (2009) theoretical model, overlapping AC directorships are linked to knowledge spillovers, which are useful for AC’s financial reporting monitoring.…”

“…Furthermore, Fernandez-Mendez et al (2017) find a positive impact of overlapped AC on qualified audit opinions, indicating increased FRQ. Besides, Chandar et al (2012), Habib and Bhuiyan (2016), Kalelkar (2017) and Velte (2017) find a positive relationship between overlapped AC and FRQ (proxied by DA) in different contexts (Australia, Germany and the USA). In addition, Kalelkar (2017) identifies a negative relationship between overlapped AC and audit fees as a proxy for FRQ.…”

“…Tanyi and Smith (2015) find that busyness affects the AC chairperson's and AC financial experts' monitoring of a company's financial reporting process, negatively affecting AC's effectiveness (Furqaan et al, 2019). However, Velte (2017) does not find any significant relationship between overlapped financial experts' directors and FRQ. We believe that overlapped AC directors with accounting expertise will disclose more FLD quality, and they might reduce FLD quantity when they are overcommitted.…”

“…2.2 Types of overlapping audit committee directorship 2.2.1 Overlapped audit committee with compensation committee and forward-looking disclosure. Based on the agency perspective, AC directors sitting on other board committees may positively affect the effectiveness of their work and enable them to enhance FRQ (Chandar et al, 2012) by gaining expertise because of knowledge spillovers (Brandes et al, 2016;Velte, 2017). For instance, they can provide more information regarding the chief executive's activities when they overlap with the compensation committee (Spira and Bender, 2004).…”

Which attributes of audit committees are most beneficial for European companies? Literature review and research recommendations

“…Regarding the German capital market, the chair tenure since board entrance and audit report lag are negatively related (Nipper, 2021), and overlapping ACs and compensation committees, independent financial experts as overlapping directors and non-audit fees are unrelated (Velte, 2017).…”