Audit committee diversity and financial restatements
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Audit committee diversity and financial restatements Seemantini Pathak1 · Codou Samba2 · Mengge Li3 Accepted: 5 November 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Prior research has found that characteristics of the audit committee influence the incidence of financial restatements, as does demographic diversity on boards of directors. We draw upon work team diversity research to examine the impact of relations-oriented and task-oriented diversity in the audit committee on the likelihood of fraud-related and error-related financial restatements, respectively. We argue that these two types of demographic diversity work differently through greater vigilance of the audit committee in reducing the occurrence of financial restatements. Using a matched sample of fraud-restatement, error-restatement and non-restatement U.S. firms between 1996 and 2010, we find that relations-oriented diversity is associated with a lower incidence of fraud-related restatements, while task-oriented diversity is associated with a lower likelihood of error-related restatements. We also find that the involvement of audit committee members on other board committees moderates these relationships. We discuss the important role of work team diversity mechanisms in evaluating the effectiveness of board audit committees. Keywords Demographic diversity · Audit committee · Financial restatements · Social categorization · Information elaboration
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1099 7-020-09548-4) contains supplementary material, which is available to authorized users. * Seemantini Pathak [email protected] Codou Samba [email protected] Mengge Li [email protected] 1
Department of Global Leadership and Management, University of Missouri – St. Louis, 218 Anheuser‑Busch Hall, One University Blvd., St. Louis, MO 63121‑4400, USA
2
Department of Management, Haslam School of Business, University of Tennessee Knoxville, Knoxville, TN 37996‑4140, USA
3
Marketing and Management Department, University of Texas at El Paso, El Paso, TX 79968, USA
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1 Introduction In issuing a financial restatement, an organization essentially acknowledges that it has omitted or misrepresented relevant financial information (Abbott et al. 2004; DeZoort 1998). Financial restatements are widespread and material, causing a great deal of anxiety among stakeholders regarding the quality of organizational governance and ethical decision-making among top leaders (Arthaud-Day et al. 2006; Cowen and Marcel 2011; Gomulya and Boeker 2016; Srinivasan 2005; Wahid 2019). Research focusing on the influence of boards of directors (BoDs) and their committees on firm financial misconduct (e.g., Abbott et al. 2004, 2012; Agrawal and Chadha 2005; Beasley 1996; Bruynseels and Cardinaels 2014; Cumming et al. 2015; He et al. 2018; Klein 2002, etc.) has found fewer financial restatements and better reporting quality when the board and audit committee ar
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