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Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members

Journal of accounting research, 2005-05, Vol.43 (2), p.291-334 [Peer Reviewed Journal]

Copyright 2005 The Institute of Professional Accounting, University of Chicago ;Copyright Blackwell Publishing May 2005 ;ISSN: 0021-8456 ;EISSN: 1475-679X ;DOI: 10.1111/j.1475-679x.2005.00172.x ;CODEN: JACRBR

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Title:
Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members
Author: SRINIVASAN, SURAJ
Subjects: Audit committees ; Audit evidence ; Auditing ; Audits ; Business accounting ; Business audits ; Business management ; Business structures ; Chief executive officers ; Civil proceedings ; Control variables ; Data analysis ; Earnings ; Empirical research ; Employee turnover ; Executives ; Failure ; Financial audits ; Financial management ; Financial reporting ; Financial statements ; Labour market ; Mathematical models ; Outside directors ; Regression analysis ; Studies ; Working papers
Is Part Of: Journal of accounting research, 2005-05, Vol.43 (2), p.291-334
Description: I use a sample of 409 companies that restated their earnings from 1997 to 2001 to examine penalties for outside directors, particularly audit committee members, when their companies experience accounting restatements. Penalties from lawsuits and Securities and Exchange Commission (SEC) actions are limited. However, directors experience significant labor market penalties. In the three years after the restatement, director turnover is 48% for firms that restate earnings downward, 33% for a performance-matched sample, 28% for firms that restate upward, and only 18% for technical restatement firms. For firms that overstate earnings, the likelihood of director departure increases in restatement severity, particularly for audit committee directors. In addition, directors of these firms are no longer present in 25% of their positions on other boards. This loss is greater for audit committee members and for more severe restatements. A matched-sample analysis confirms this result. Overall, the evidence is consistent with outside directors, especially audit committee members, bearing reputational costs for financial reporting failure.
Publisher: Oxford, UK and Boston, USA: Blackwell Publishing, Inc
Language: English
Identifier: ISSN: 0021-8456
EISSN: 1475-679X
DOI: 10.1111/j.1475-679x.2005.00172.x
CODEN: JACRBR
Source: Alma/SFX Local Collection
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Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members

Copyright 2005 The Institute of Professional Accounting, University of Chicago ;Copyright Blackwell Publishing May 2005 ;ISSN: 0021-8456 ;EISSN: 1475-679X ;DOI: 10.1111/j.1475-679x.2005.00172.x ;CODEN: JACRBR

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