Reputation, tenure and compensation of independent audit committee members and financial restatements

We investigate the association between the reputation, tenure and cash compensation of independent audit committee members and the likelihood of financial restatements. We examine these associations for 138 U.S. public firms that announced their restatements from 1 January 2001 to 31 December 2002 and a set of control firms matched on industry and size. We observe a negative association between financial restatements and (i) reputation of independent audit committee members and (ii) the cash compensation paid to independent audit committee members. Our results suggest that independent audit committee members holding multiple directorships have incentives to enhance and protect their reputation by ensuring the financial statements are of high quality. Our findings on compensation suggest that monetary incentives motivate independent directors to be vigilant and challenge management in their oversight of the financial reporting process.