Overlapping memberships on audit and other board committees : impacts on financial reporting quality

Abstract

Corporate boards are categorised into compulsory and/or voluntary sub-committees, with each sub-committee having specific roles to play on the board. However, members of these different committees overlap other committees on the same corporate board. This study investigates how overlapped members on the audit committee impact the primary role of the committee specially in regards to improving the quality of financial reporting of the firm. Agency theory assumes that overlapping memberships negatively impact the financial reporting quality since members are busy with the activities of other board committees. However, resources dependency theory views that overlapping memberships increase the firm’s internal dependency through collaboration and information sharing between different board committees. This improves the effectiveness of each board committee and the financial reporting quality of the firm. The population of the study consists of non-financial institutions listed on Bursa Malaysia. Using purposive sampling, cross-sectional data were collected from the annual reports of the 100 top companies listed on Bursa Malaysia. The descriptive statistics of the study shows that almost every company observed in this study has overlapping membership on audit and other board committees. The study also shows that more than three-fourths of the audit committee members also work on other board committees. From regression analysis, the study found that overlapping memberships on audit committee and other mandatory committees, such as remuneration and nominating committees, significantly and positively impact the financial reporting quality (negatively impact earnings management). The study also indicates that the chair of the audit committee contributes better in improving the financial reporting quality when he/she overlaps other board committees. This result supports resources dependency theory over agency theory. Thus, regulatory bodies and investors should encourage the chair of the audit committee to work on other board committees to bring in relevant information to improve the performance of the audit committee.