How Boards Use Auditor-Provided, Non-Public Information in Overseeing Management

To what extent do directors care about financial reporting? Prior research provides some evidence that financial reporting quality is important to boards and that financial misreporting influences their executive retention decisions. For example, the public revelation of past financial reporting errors or intentional misstatements increases the likelihood that the board will dismiss the CEO or CFO. However, restatement announcements, financial-statement fraud, and other publicly revealed attempts to misstate earnings reflect poorly on both management and the board, creating an incentive for directors to deflect responsibility from themselves. Thus, it is not necessarily clear whether directors respond to financial misreporting because … Read more