Accounting Restatements and Audit Committee Director Departures

Audit committees play an important role to ensure the reliability of financial reporting. Audit committee directors could choose to depart if they perceive an increased likelihood of low-quality financial reporting. Moreover, their departures and market reactions could signal misstatement risk and the market’s attitude toward such departures, respectively. This dissertation explores whether the characteristics of audit committee directors are associated with the likelihood of departures before and after the announcement of financial restatements. Specifically, I examine if financial expertise, busyness, tenure, and gender of the directors are associated with such departures, loss of other directorships, and market reactions. The first part investigates the association between characteristics of directors and the likelihood of audit committee director departure. My evidence shows that financial experts are overall less likely to depart before and after the restatement announcement. However, the departure likelihood for financial experts is higher in the post-announcement period than in the pre period. In addition, long-tenured directors are more likely to leave after the announcement. Finally, female directors are less likely to depart in the pre-announcement period. In part two, I explore how these characteristics are associated with loss of other directorships following the restatement. I find that departing financial experts experience a higher likelihood of loss in other directorships. In addition, busy and female directors are more likely to lose other directorships. I further find a higher likelihood of other directorship loss for departing financial experts when the misstatements are material. The third part examines the association between characteristics of departing directors and market reactions. My results show that financial expert departures before the announcement signal misstatement risk and lead to lower cumulative abnormal returns. Further, female director departures serve as a warning signal when the misstatements are material. In the post-announcement period, I find higher cumulative abnormal returns for unplanned financial expert departures, suggesting that the market expects an improvement in financial expertise. Overall, my results provide implications to regulators, management, and practitioners that the departures of audit committee directors serve as informative signals to financial reporting failures. The findings also support the requirements of SOX Section 407, which requires disclosures of financial experts serving on audit committees