Journal Article

Do Director Networks Matter for Financial Reporting Quality? Evidence from Audit Committee Connectedness and Restatements

Omer, Thomas C., Shelley, Marjorie K., Tice, Frances M.

2020

Overview

This study examines the effect of audit committee connectedness through director networks on financial reporting quality, specifically the misstatement of annual financial statements. Using network analysis, we examine multiple dimensions of connectedness and find that after controlling for operating performance and corporate governance characteristics, firms with well-connected audit committees are less likely to misstate annual financial statements. In addition, our study demonstrates that audit committee connectedness through director networks moderates the negative effect of board interlocks to misstating firms on financial reporting quality. We conduct several tests to address identification concerns and find similar results. Our findings suggest that firms with better-connected audit committees are less likely to adopt reporting practices that reduce financial reporting quality. This paper was accepted by Suraj Srinivasan, accounting.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: audit committee / Audit committees / Auditing / Auditing standards / Auditors / Audits / Boards of directors / Committees / Companies / Connectedness / Corporate governance / Financial reporting / financial reporting quality / Financial statements / Governance / Interlocking directorates / Network analysis / restatements / Social networks