The Relationship between Board Characteristics and Voluntary Improvements in Audit Committee Composition and Experience*

TLDR

Audit committee staffing decisions directly influence the committee’s ability to monitor management’s financial reporting on behalf of the board. The study investigates how board characteristics affect the voluntary expansion of audit committee composition beyond mandated minimums, focusing on the inclusion of outside directors with financial reporting and audit expertise. Results show that Canadian firms that voluntarily enlarge audit committees and include more outside directors tend to have larger boards, more outside members, and are more likely to separate the chair from the CEO, indicating stronger governance.

Abstract

Abstract This study empirically examines the relation between certain board of director characteristics and the extent that audit committee composition voluntarily exceeds minimum mandated levels and includes outside directors with financial reporting and audit committee knowledge and experience. This study focuses on board characteristics because the board directly controls audit committee membership. Such staffing decisions can directly affect the ability of the audit committee to monitor management's financial reporting process on behalf of the board. Results suggest that Canadian firms that voluntarily include more outside directors on the audit committee than the mandated minimum have larger boards with more outsiders serving on those boards and are more likely to segregate the board chairperson position from the CEO/president positions. Additionally, firms that voluntarily create audit committees composed of outsider members with a breadth of relevant financial reporting and audit committee knowledge and experience have boards that are larger, have more outside members, and are less likely to be chaired by the CEO/president. Implications of these findings for auditors, institutional investors, regulators, and other interested parties are discussed.