Audit committee financial expertise and earnings management: The role of status

- Audit committee status is now lower due to increased financial expertise and board independence.
- Expertise and relative status are important determinants of ability to influence outcomes.
- Earnings management is lower in the presence of both financial expertise and high relative status.
- These results speak to consequences of financial expertise, the focus of considerable debate.

Regulatory pressure to increase both audit committee financial expertise and board independence has resulted in lower status for audit committees relative to management. This status differential is relevant because expertise and relative status are important determinants of each party׳s ability to influence outcomes, particularly when parties face conflicting goals. We find that audit committees with both financial expertise and high relative status are associated with lower levels of earnings management, as measured by accounting irregularities and abnormal accruals. These results speak to benefits and limitations of financial expertise, which have been the focus of considerable debate.