Audit committee–CFO political dissimilarity and financial reporting quality

In this study, we investigate the effect of political dissimilarity between the audit committee and the CFO, which captures the underlying differences in risk and novelty preferences between these parties, on financial reporting quality. We find that audit committee–CFO political dissimilarity is associated with a lower likelihood of financial misstatements and abnormal accruals. This effect is stronger for firms operating in more uncertain and complex environments, those that narrowly meet or beat analyst consensus forecasts, and those with less powerful CFOs. Audit committee–CFO political dissimilarity is also associated with fewer material weaknesses and a lower likelihood of having “small” profits. Further testing suggests the dissimilarity–financial reporting quality relation is salient in settings within the purview of the audit committee where decisions are inherently complex, can be subjective, and are more likely to be associated with disagreements with management, such as goodwill impairments and tax avoidance.