The Long-Run Implications of Audit Committee Overboarding on Auditor Contracting and Financial Reporting Quality

Abstract

Since the passage of the Sarbanes-Oxley Act (SOX) there has been a concern amongst regulators and the investing community that overboarded audit committees, those with members holding multiple other board seats, are unable to effectively monitor the companies they represent. I find these concerns unwarranted. Results indicate that more overboarded audit committees have adequately adjusted to their increased workloads in the decade since SOX to such a degree that they have lower misstatement frequencies than less overboarded committees. Initially through contracting with their auditors and later by moving along their own learning curve, more overboarded audit committees have found responses that aid in their monitoring, leading to higher quality financial reporting. Overall, I find that more overboarded audit committees perform effective monitoring despite members serving on multiple other boards. Results suggest that reputational concerns and preserving opportunities for future board nominations outweigh the time constraints associated with being more overboarded.

Keywords: audit committees, financial reporting quality, monitoring, overboarding