Problem Directors on the Audit Committee and Financial Reporting Quality

The objective of this paper is to examine empirically the consequences for financial reporting quality of having audit committees that include problem directors, i.e. directors with prior involvement in corporate bankruptcies, major accounting restatements or other accounting scandals. An ordinary least squares regression model is used to examine the association between problem directors on the audit committee and financial reporting quality as proxied by accruals and real earnings management. Results reveal that there is a positive association between the presence of problem directors on the audit committee and real earnings management, and this association is more pronounced in cases where those problem directors have been involved in prior instances of accounting restatements and fraudulent reporting practices