Organización: factores internos y externos

A broad literature review on AC can be found in DeFond and Zhang (2014) and Malik (2014). In this thesis, I focus on two related streams most related to the current interests: those concerned with internal control effects and those concerned with financial reporting quality.

A stream of internal control studies presents largely consistent results that internal control quality, considered an important determinant of higher financial reporting quality, is influenced significantly and positively by AC financial expertise. The existence of internal control problems is found to be associated negatively with AC financial expertise, particularly accounting expertise

(Krishnan 2005; Zhang et al. 2007). As there is a negative association between AC accounting expertise and a lower likelihood of disclosing material weaknesses in internal control related to accounting matters, this would appear to have audit consequences (U. Hoitash et al. 2009). The weight of evidence suggests that AC accounting expertise is more important than supervisory expertise in reducing the likelihood of significant internal control weaknesses, and thus it should result in fewer audit concerns and higher accounting quality. However, Goh (2009) reports that the timeliness of the remediation of internal control deficiencies is improved significantly by supervisory expertise but not by accounting expertise.

Complementing these studies of internal control quality, another stream of studies provides evidence that is more direct with regard to AC financial expertise enhancing financial reporting quality. Early studies, without differentiating accounting and supervisory-related financial experts, report that overall, financial expertise is associated with higher financial reporting quality. For example, McDaniel, Martin, and Maines (2002), an experimental study, find that the framework used by AC financial experts to evaluate the financial reporting quality is more consistent with accounting standards and the experts are less likely to be distracted by financial items that are less critical to reporting quality. Relatedly, archival studies report that ACs with at least one financial expert significantly reduce the likelihood of financial restatements (Abbott, Parker, and Peters 2004); earnings management is negatively associated with having financial experts on an AC (Bédard, Chtourou, and Courteau 2004; He and Yang 2014); and financial statement fraud firms have fewer AC financial experts (Farber 2005).

Later studies that differentiate between accounting and supervisory expertise suggest that the enhancement of financial reporting quality is contributed mainly by accounting experts, rather than supervisory experts. Several studies report that having accounting experts on an AC (but not

supervisory experts) is positively associated with accrual quality, accounting conservatism, or more timely restatement disclosures (e.g., Dhaliwal et al. 2010; Krishnan and Visvanathan 2008; Schmidt and Wilkins 2013). R. Hoitash and U. Hoitash (2018) use the number of accounting items disclosed in 10-K filings to proxy for the underlying complexity of entities’ financial reports preparation and find a strong negative association with financial reporting quality, but this effect is countered by having more accounting expertise in the AC. In addition, the contribution of accounting expertise to companies’ financial reporting quality is supported by the finding that the market reacts favorably only to the appointment of accounting experts to the AC, but not of supervisory experts (DeFond, Hann, and Hu 2005).

Collectively, previous findings suggest that an entity’s financial reporting quality is enhanced by AC expert members who can better monitor the company’s financial statements and review significant financial reporting judgments, but that accounting experts are more effective in this role. Presumably, this is because they are more familiar with accounting concepts and the auditing process, and are better at identifying SIFs.

In recent years, the relevance of AC members’ experience in the specific entity’s industry to financial reporting quality has received substantial attention. Cohen et al. (2014) find that AC industry experience has a positive incremental effect on the financial reporting quality that is additional to financial expertise alone. Specifically, they find that having more AC members with accounting and industry expertise reduces the likelihood of financial restatements and the level of discretionary accruals, while AC supervisory and industry expertise are negatively associated with income-increasing discretionary accruals. Wang, Xie, and Zhu (2015) also find that AC industry expertise is negatively associated with abnormal accruals. Experimental evidence suggests that the influence of AC industry expertise is valued by investors; for example, Cohen, Gaynor, and

Krishnamoorthy (2017) find that investors assess AC members with industry experience as more competent.30 _{Overall, there is persuasive evidence that AC members who have experience in the}

specific entity’s industry are more effective in monitoring the financial reporting process, presumably because this experience means they have more understanding of the industry-specific challenges, opportunities, and financial conditions.

The pattern of prior results suggests that entities with more AC accounting expertise or more AC industry expertise exhibit higher financial reporting quality and will present fewer audit concerns (potentially reducing reported KAMs in EARs). However, I do not have any direct evidence as to whether the presence of accounting experts or industry experts on an AC improves the communications between the AC and its external auditors, or the potential for auditors and ACs to be concerned with different significant issues, as reflected in differences in KAMs and SIFs.