Financial Experts on the Audit Committee : Wolves in Sheep’S Clothing?

Research literature in accounting has assumed, and supported, the idea that financial expertise on the audit committee of firms is a positive influence on the quality of earnings reports, as measured by various proxies for earnings quality. In this paper I attempt to model and demonstrate empirically that financial expertise on the audit committee may in fact serve to merely obscure any earnings manipulation performed by managers, rather than prevent or mitigate it. The results provide support for the idea that financial expertise, when put together with certain adverse incentive factors (share ownership, being a current executive in another firm), actually increases the probability of just meeting or beating analyst consensus estimates, a measure of earnings manipulation. This presents an important contribution to the literature on the topic, elucidating the idea that financial expertise on the audit committee is not necessarily a beneficial factor.[enter Abstract Body]