Costs and Benefits of Audit Committee Interlocking

Hammami, Ahmad
Lyubimov, Alex
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The focus of this paper is the relationship between audit committee interlocking and audit fees, likelihood of a late filing of the form 10-k, and internal control effectiveness. We contribute to the corporate governance literature by showing that interlocked audit committee members are capable of positively influencing the corporate governance environment across the firms they serve, however that comes with a cost. Specifically, we show that interlocking of audit committee members has a significantly negative association with internal control weaknesses as well as late filing of 10-k reports. We also show that these favorable outcomes, come with an added cost of higher audit fees. We believe these results show that interlocked audit committee members transfer their company enhancing knowledge and expertise across the firms they serve, thus the improved internal controls and efficiency in meeting their filing deadlines, while demanding better quality audits from their external auditors, which explains the higher audit fees. Prior research shows that audit committee interlocking as associated with poor financial reporting, as indicated in Sharma and Iselin (2012), and Tanyi and Smith (2015). Our results, contrary to prior research, show that interlocked board members are associated with the transfer of favorable outcomes across the companies they serve.
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Audit committee interlocking, Audit fees, Late filing, Internal control effectiveness
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