Shareholder Elections of Audit Committee Members

Abstract

SUMMARY Voting in directors' elections is one of few mechanisms by which shareholders can influence corporate governance choices. We study elections of directors who serve on the audit committee (AC), a topic receiving little attention in past work. Our results show that AC members, especially those who do not serve on the compensation or nominating committees, receive greater shareholder support than other independent board members. We further find that among AC members, more qualified members, in terms of accounting expertise, receive greater support, while AC chairs without such expertise receive lower support. In addition, when the AC is less effective in monitoring the financial reporting process, its members receive lower shareholder approval, while other independent board members are less affected by these same financial reporting factors. Finally, when the AC is less effective, all of its members receive lower support, irrespective of their expertise or position within the committee.

Audit Committee Financial Expertise, Litigation Risk, and Auditor‐Provided Tax Services*

“…These new regulations, together with disclosure requirements regarding audit and NAS fees, have raised AC members' expectations of their effectiveness, intensified scrutiny of ACs and their accountability to shareholders (Gaynor et al, 2006; Vera‐Munoz, 2005). Thus, AC members have greater incentives to perform their duties diligently, as shareholders may express their dissatisfaction with AC members through litigation (Brochet and Srinivasan, 2014; Sharma and Iselin, 2012), more negative votes at reelection (Gal‐Or, Hoitash, and Hoitash, 2018), and lost positions on other boards (Srinivasan, 2005). When SOX 202 and the SEC Revised Independence Regulations (SEC, 2003b) were enacted, some questioned AC members' ability to evaluate the real and/or perceived risk of independence impairment (Beale, 2004; O'Malley, 2000).…”

“…Furthermore, even though tax NAS may not affect the auditor's independence in fact , ACT‐FEs may be sensitive to stakeholders' negative perceptions (e.g., Doty, 2011), even more than other AC members. Because ACT‐FEs are valued by shareholders more than other AC members (Gal‐Or et al, 2018; Singhvi, Raghunandan, and Mishra, 2013), they have greater incentives to be diligent and be perceived as good monitors as they face greater reputation costs (e.g., higher turnover and loss of positions on other boards) (e.g., Gaynor et al, 2006). Furthermore, when they fail to effectively monitor the financial reporting process, ACT‐FEs are more likely to depart the AC following a low AC approval rate (Srinivasan, 2005).…”

Tracking the development of audit committees in Singapore listed companies

“…A large body of research has shown that AC members' financial expertise is associated with better financial reporting quality and lower earnings management (Abad and Bravo, 2018;Chen and Komal, 2018;Chychyla et al, 2019;Deslandes et al, 2020;Farber et al, 2018;Inaam and Khamoussi, 2016;Kim and Klein, 2017;Lee and Park, 2019;Lin et al, 2015;Safari, 2017;Sultana et al, 2015). There are also studies, which show that AC members who are financially trained matters when it comes to voting for directors at AGMs or sending positive signals to lenders (Gal-or et al, 2018;Schneider, 2018).…”

Non‐generally accepted accounting principles disclosures and audit committee chairs’ external directorships

“…Further, the Center for Audit Quality (CAQ) recently released publications emphasizing the important role of an audit committee in ensuring compliance with Regulation G and presenting non‐GAAP disclosures fairly (CAQ, 2018a, 2018b). The audit committee chair (ACC) plays a pivotal role in financial reporting oversight and the audit committee's effectiveness (Carcello et al., 2011; Gal‐Or et al., 2018; Schmidt & Wilkins, 2013). However, we know very little about the influence of the ACC on firms’ non‐GAAP disclosures.…”

“…Beyond the core responsibility of financial reporting oversight, an ACC determines the audit committee's effectiveness (Carcello et al., 2011; Gal‐Or et al., 2018; Schmidt & Wilkins, 2013). An ACC is the focal point of the committee's relationship with the board, chief financial officer and internal and external auditors (Schmidt & Wilkins, 2013).…”