Are intergroup differences between the audit committee and the rest of the board associated with monitoring effectiveness?

In contrast to prior research that typically focuses on the characteristics of the audit committee (AC), we investigate how intergroup differences between the AC and the rest of the board (ROB) affect monitoring effectiveness. Drawing on group literature and the similarity attraction paradigm, we hypothesize that high intergroup differences between the AC and the ROB impede communication and information sharing. Poor “fit” between the AC and the ROB can lead to an “us versus them” mentality that reduces trust and hinders knowledge exchange, diminishing monitoring effectiveness. Using a sample of listed US firms, we find that intergroup differences between the AC and the ROB in terms of their respective characteristics are linked to a lower likelihood of reporting an existing or likely material weakness, higher discretionary accruals, and a lower likelihood of a going-concern opinion among financially distressed firms. These negative effects are most pronounced when the AC and the ROB are very different (i.e., in the upper quartile and decile of the AC-ROB distance distribution). Additional analyses show a higher probability of a Big R restatement, a lower likelihood of a Big R restatement when a material misstatement likely exists, and a lower likelihood of goodwill impairment when one is expected. Notably, the adverse impact of AC-ROB dissimilarity is more prominent when the AC is less powerful or lacks group stability. Regulators and companies should be aware that AC composition decisions cannot be made in isolation because large intergroup differences in director profiles between the AC and the ROB reduce monitoring effectiveness.