The Audit Committee: Management Watchdog or Personal Friend of the CEO?

February 24, 2014 Leave a comment

THE ACCOUNTING REVIEW American Accounting Association

Vol. 89, No. 1 DOI: 10.2308/accr-50601 2014 pp. 113–145

The Audit Committee: Management Watchdog or Personal Friend of the CEO?

ABSTRACT: To ensure that audit committees provide sufficient oversight over the

auditing process and quality of financial reporting, legislators have imposed stricter

requirements on the independence of audit committee members. Although many audit

committees appear to be ‘‘fully’’ independent, anecdotal evidence suggests that CEOs

often appoint directors from their social networks. Based on a 2004 to 2008 sample of

U.S.-listed companies after the Sarbanes-Oxley Act, we find that these social ties have a

negative effect on variables that proxy for oversight quality. In particular, we find that

firms whose audit committees have ‘‘friendship’’ ties to the CEO purchase fewer audit

services and engage more in earnings management. Auditors are also less likely to issue

going-concern opinions or to report internal control weaknesses when friendship ties are

present. On the other hand, social ties formed through ‘‘advice networks’’ do not seem to

hamper the quality of audit committee oversight.

 

Filed under Investing Process

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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