CEO power and the strategic selection of accounting financial experts to the audit committee

Abstract

We examine the role of CEO power in the appointment of accounting financial experts (AFEs) to firm audit committees. Our results show that firms with powerful CEOs have a lower likelihood of appointing AFEs to their audit committees. Additionally, effective AFEs—those characterized by experience, high status, and social independence from the CEO—are less likely to be appointed in firms with powerful CEOs. In the presence of powerful CEOs, effective AFEs are also less likely to be designated audit committee chair. The absence of effective AFEs is associated with the use of accounting discretion by powerful CEOs to meet or just beat analyst earnings forecasts. We find no evidence that AFEs choose to avoid serving on the boards of firms with powerful CEOs. Our findings are consistent with powerful CEOs influencing board appointments post‐SOX through informal channels, including through their social ties with nominating committees. Our results suggest that current regulations prohibiting CEO involvement in the director nomination process and specifying who qualifies as a financial expert may be insufficient to ensure audit committee effectiveness and financial reporting quality.This article is protected by copyright. All rights reserved.

CEO Power and Firm Value: Affirmative Action Implications

“…This is because CEOs from the founding family usually hold controlling shares of the company while also occupying the highest management position. Therefore, founding family CEOs have strong incentives to maximize shareholder interests, even though sometimes taking excessive risks that harm the company [25]. In contrast, non-family CEOs tend to be more careful in decision making be-cause they want to retain their position.…”