Professional Diversity of the Audit Committee and the Effect on the Financial Reporting Process

Abstract

This study examines the influence of audit committee professional diversity (defined as the variation of group knowledge resulting from group members’ differing current and past professional experiences) on the committee’s effectiveness. Using U.S. companies from 2003-2013, the results show a positive association between the professional diversity of the audit committee and financial reporting oversight, measured alternately as reduced financial statement misstatements, material weakness disclosures, or consecutive material weakness disclosures. Moreover, connections to another professionally diverse audit committee reduce the likelihood of financial statement misstatements and material weakness disclosures. These results suggest that professional diversity benefits audit committee effectiveness to a point, but that too much diversity might result in tension among audit committee members and limit the benefits of diversity.