Audit Committee Oversight and Financial Reporting Reliability : Are Audit Committees Overloaded?

We examine the relation between audit committee (AC) responsibilities and financial reporting reliability. AC responsibilities have increased over time, prompting concerns that overloading ACs may impair financial reporting. Using new AC charter-based proxies to measure AC responsibilities, we find that AC’s risk-related oversight responsibilities are associated with reduced financial reporting reliability, as proxied by restatements – consistent with AC overload by distraction. The effects of this overload are (i) weaker when ACs have more members to share the duties and when ACs engage high quality auditors and (ii) exacerbated when AC members and auditors are busy with multiple board appointments and busy season audits, respectively. We also find that the harmful effect on financial reporting holds only when the AC has the highest level of risk-related oversight responsibilities. In contrast, we find that AC oversight over internal controls is associated with improved financial statement reliability. To our knowledge, we are the first to document that the nature of AC duties impacts the AC’s ability to promote financial reporting reliability