Audit committee financial expertise and misappropriation of assets

Abstract

Purpose

The purpose of this paper is to investigate the relationship between the financial expertise of the audit committee (AC) and the incidence of misappropriation of assets in publicly held companies in the USA.

Design/methodology/approach

The sample consists of 28 publicly held companies in the USA experiencing misappropriation of assets from 1987 to 1998, as well as 28 control companies matched according to size, industry, and time period. The effectiveness of the AC's financial expertise in reducing the occurrence of misappropriation of assets is examined by logistic models using two specific types of financial expertise: accounting and non‐accounting financial expertise.

Findings

The results support the notion that an independent AC member is only effective in reducing the occurrence of misappropriation of assets in publicly held companies if he/she is also a financial expert.

Research limitations/implications

The paper contributes to the debate on the appropriate definition of “financial expert” and the efficacy of the financial expertise of AC members – as defined by the Sarbanes‐Oxley legislation – in reducing the incidence of misappropriation of assets in publicly held companies in the USA. The paper includes only 28 cases of misappropriation of assets by employees involving collusion with an outsider, as discovered and reported in the news (i.e. newsworthy cases).

Originality/value

While previous studies have drawn attention to the relationship between AC independence and misappropriation of assets, there is no empirical evidence to support or to refute the hypothesis that financial expertise has an impact on the occurrence of misappropriation of assets. This paper is the first to examine the association between the effectiveness of the AC and the occurrence of misappropriation of assets by testing the interaction between AC members' financial expertise and their independence.

Citation

Mustafa, S.T. and Ben Youssef, N. (2010), "Audit committee financial expertise and misappropriation of assets", Managerial Auditing Journal, Vol. 25 No. 3, pp. 208-225. https://doi.org/10.1108/02686901011026323