Audit Committee Accounting Experts Provide Benefits beyond Accounting

What is it about?

SOX added a requirement that all audit committees of the board have at least one financial expert on the committee. We capitalize on this widespread change and use data around the implementation of SOX to determine if additions to the audit committee provide benefits other than the expected improved accounting quality. We distinguish between accounting experts (experts with direct accounting work experience) and other financial experts (experts with financial reporting supervisory experience or experience in analyzing or evaluating financial statements). We find that after boards add an accounting expert to their audit committee, more analysts follow the firm and firms experience higher stock trading volume.

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Why is it important?

Accounting experts are often in short supply and firms can fulfill the requirement for a financial expert by adding people without direct accounting experience. Our findings suggest that accounting experts can help to reduce a firm's cost of capital, therefore providing an important reason for firms to add accounting expertise to the audit committee in spite of the difficulty of doing so.