The Role of Firm Status in Appointments of Financial Experts to Audit Committees

Since 1999, regulators have attempted to improve the monitoring of financial reporting by exerting significant pressure on firms to appoint financial experts to their audit committees. Yet, many firms have been reluctant to do so, which has made these firms more prone to financial reporting problems. We examine appointments of financial experts to the audit committees of S&P 1500 firms during the period 1999-2008 to explore whether concerns about the status of financial experts discouraged firms from appointing them. We find that typical financial experts (retired auditors) have lower director status (board seats, trusteeships, social club memberships, and elite education) than typical directors (retired CEOs), and that this status gap is larger for higher status firms (larger, better connected, and more admired firms). Moreover, we find that higher status firms are less likely to appoint financial experts, suggesting that status-related concerns reduce the demand for financial expertise on audit committees.