Cultural Diversity of Audit Committees and Firms’ Financial Reporting Quality

Accounting Horizons

Posted: 25 Mar 2020 Last revised: 18 Jan 2021

See all articles by Robert Felix

Robert Felix

Catholic University of America (CUA) - Busch School of Business and Economics

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Mengxin Zhao

Independent; Securities and Exchange Commission (SEC)

Date Written: January 15, 2021

Abstract

We examine the effect of audit committees’ cultural diversity, as measured through ancestral cultural diversity of audit committee members, on firms’ financial reporting quality. We find that audit committee cultural diversity is associated with a lower likelihood of financial accounting restatements. Our results are driven by firms operating in more complex environments, which suggests that audit committee cultural diversity may be particularly important when the firm is inherently complex. We also find that cultural diversity is associated with a lower likelihood of restatements for companies with more powerful CEOs, suggesting that more culturally diverse audit committees are more effective in restraining CEO accounting opportunism. Additionally, we document that audit committee cultural diversity is associated with an array of other measures of higher reporting quality. Our study thus highlights the importance of cultural diversity in audit committee effectiveness.

Keywords: Audit Committee, Culture, Diversity, Accounting Quality

JEL Classification: M40, M41

Suggested Citation

Felix, Robert and Pevzner, Mikhail and Zhao, Mengxin, Cultural Diversity of Audit Committees and Firms’ Financial Reporting Quality (January 15, 2021). Accounting Horizons, Available at SSRN: https://ssrn.com/abstract=3546182 or http://dx.doi.org/10.2139/ssrn.3546182

Robert Felix

Catholic University of America (CUA) - Busch School of Business and Economics ( email )

620 Michigan Avenue, NE
Washington, DC 20064
United States

Mikhail Pevzner (Contact Author)

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

Mengxin Zhao

Independent

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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