Legal Expertise on Corporate Audit Committees and Financial Reporting Quality

Posted: 12 Sep 2011

See all articles by Jayanthi Krishnan

Jayanthi Krishnan

Temple University - Department of Accounting

Yuan Wen

Georgia Southern University

Wanli Zhao

Renmin University of China

Date Written: May 2011

Abstract

Recent trends in corporate board composition indicate an increase in the appointment of directors with legal expertise. Using two financial reporting quality measures, accruals quality and discretionary accruals, we find – for a sample of Russell 1000 firms in 2003 and 2005 – that the presence (and proportion) of directors with legal backgrounds on the audit committee is associated with higher financial reporting quality. These results obtain after controlling for accounting expertise on audit committees. Also, supplementary tests indicate a positive association between changes in legal expertise and changes in financial reporting quality, suggesting that legal expertise serves as a monitor rather than as a signal of financial reporting quality. Further, the two forms of expertise interact - i.e., the presence of directors with both forms of expertise enhances financial reporting quality, beyond the contribution of the individual forms of expertise. Additional tests suggest that the positive effects of legal expertise are greater in the post-SOX period compared with a pre-SOX year.

Keywords: Audit Committee, Legal Expertise, Financial Expertise, Financial Reporting Quality

JEL Classification: G34, G38, K22, M41, M49

Suggested Citation

Krishnan, Jayanthi and Wen, Yuan and Zhao, Wanli, Legal Expertise on Corporate Audit Committees and Financial Reporting Quality (May 2011). Accounting Review, Vol. 86, No. 6, 2011, Available at SSRN: https://ssrn.com/abstract=1925915

Jayanthi Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Yuan Wen

Georgia Southern University ( email )

P.O. Box 8151
Statesboro, GA 30460-8151
United States

Wanli Zhao

Renmin University of China ( email )

59 Zhongguancun Street
Beijing, 100872
China

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