Audit Committee Member Contextual Experiences and Financial Reporting Outcomes

Abstract

Audit committee independence rules reduce potential firm-specific information for audit committees and self-interest may bias manager-provided information. Given these considerable limitations, it is important to understand how audit committee members (ACMs) obtain information for their monitoring activities. I investigate how a firm’s (focal firm) financial reporting monitoring outcomes are affected by its ACMs’ contextual experiences, either as managers or monitors, with other firms (interlocks). Specifically, I estimate whether contextual experiences with goodwill impairment decisions, measured as interlocks with firms that likely performed extensive impairment analyses in the prior year, affect the likelihood of focal firm goodwill write-off, other things equal. Overall results suggest that ACM contextual experiences increase the likelihood of goodwill write-off and are most influential when contextual experience is obtained as a manager, rather than a monitor. However, for large firms, contextual experience does not affect reporting when managerial equity-based incentives are strong.