Gnanakumar Visvanathan

Does the SOX Definition of an Accounting Expert Matter? the Association between Audit Committee Directors' Accounting Expertise and Accounting Conservatism

The Sarbanes-Oxley Act mandates the disclosure of whether at least one member of the audit committee is a financial expert. However, the final version of the rule adopted by the SEC defined experts to include both accounting and non-accounting experts. Did the SEC do the right thing? Are the non-accounting experts just as competent as the accounting experts in enhancing the quality of financial reporting? For a sample of S&P 500 firms we examine whether the audit committees financial expertise is associated with accounting conservatism, a fundamental characteristic of financial reporting. Our results suggest that an audit committees financial expertise is positively associated with conservatism when financial expertise is defined to include only accounting experts. Our findings are consistent with the notion that accounting expertise contributes to greater monitoring by the members of the audit committee which in turn enhances conservatism. However, this finding is conditional upon the firms overall corporate governance, i.e., in weak boards accounting financial expertise is ineffective in promoting conservative accounting. Our findings have implications for regulators, corporate boards, and the accounting profession. Our findings are also relevant to regulators in other countries who are considering adopting measures to enhance corporate governance, particularly the effectiveness of the audit committees.

Do Auditors Price Audit Committee's Expertise? The Case of Accounting Vs. Non-Accounting Financial Experts

The issue of whether audit pricing reflects the risk of corporate governance failure is of fundamental interest to auditors, managers, and others. Auditors are expected to price corporate governance risk because it relates to the control risk and thus, the overall audit risk. This study examines the relation between audit fees and a key aspect of effective governance, i.e., the expertise of the audit committee. Though the Sarbanes-Oxley Act mandates the disclosure of a financial expert, the SEC defined experts broadly to include accounting or non-accounting financial experts. Does audit pricing differentiate between accounting and non-accounting financial expertise? For a sample of S&P 500 firms for the years 2000 through 2002, we find that after controlling for several board and audit committee characteristics and firm characteristics, audit pricing is negatively related to accounting financial expertise. However, this finding is conditional upon the strength of the overall governance structure, i.e., in weak boards the presence of audit committee financial expertise may not be effective in mitigating control risk. Overall, our evidence is consistent with the SECs initial narrow definition to include only accounting financial experts that is valued by the auditors. The lack of a significant relationship between non-accounting financial expertise and audit fees suggests that auditors perceive only accounting financial expertise contributes to increased monitoring by the audit committee and thus, mitigates the risk of governance failure.

An empirical investigation of ‘closeness to cash’ as a determinant of earnings response coefficients

Abstract ‘Closeness-to-cash,’ specified in terms of the extent that earnings approximate operating cashflows, is frequently advanced as a desirable property of earnings. We consider whether the security price response to unexpected earnings, as indicated by the earnings response coefficient (ERC), depends on the extent that earnings are historically close to operating cashflows. Using a sample of 1993-1999 quarterly earnings announcements, we find that the ERC varies inversely with the relative (size-adjusted) absolute magnitude of the accrual component of quarterly earnings after controlling for other well-documented determinants of ERC. Such results support the closeness-to-cash property of a firms earnings time series as an important ERC determinant.