Audit Committee Appointments

By Vafeas, Nikos | Journal of Accountancy, October 2001 | Go to article overview

Audit Committee Appointments


Vafeas, Nikos, Journal of Accountancy


Is independence the only factor that counts?

Does the emphasis on not appointing to an audit committee corporate board directors who have significant relationships to a company obscure consideration of other characteristics that also may be important? Independence aside, a director's ability and willingness to perform well may ride on whether he or she has equity investments in a company, holds other directorships, sits on additional committees or is a "seasoned" player. To determine how these factors influenced the selection of directors from among outside candidates, I compared 262 directors appointed to audit committees of public companies between 1995 and 1998 to a control group of the same number of directors selected for other committees.

The comparison showed that a director's share ownership in the company, measured in terms of its market value, was unrelated to the likelihood of audit committee appointment. Predictions of the effect of this factor on appointments had been mixed: Some had held that directors who owned stock would be more likely to protect shareholders' interests. Others proposed too much equity might give directors an incentive to turn a blind eye to management's manipulation of earnings--in their favor. Surprisingly, directorship experience in other companies, a trait likely to enhance performance, also was not related to the chances of appointment. …

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