Audit Committee-CFO Political Dissimilarity and Financial Reporting Quality

Abstract

Although a large literature in accounting examines the role that audit committees play in the oversight of the financial reporting process, little is known about how the interactions between the audit com-mittee as a group and top management affects financial reporting choices. In this study, we investigate the effect of an important type of group dynamic, namely the political dissimilarity between the audit committee and the CFO, on financial reporting quality. Using a large sample of hand-collected political donation data, we find that audit committeeCFO political dissimilarity is associated with lower like-lihoods of financial restatements, lower likelihood of material weaknesses, and lower audit fees. Im-portantly, these positive financial reporting quality outcomes exist even after controlling for other features of the audit committeeCFO relationship, namely gender, age, and relative power, local ide-ological heterogeneity, and CEO ideological dissimilarity with both the audit committee and the CFO. Further testing shows that the effects of CFOpolitical dissimilarity on financial reporting quality is salient in settings within the purview of the audit committee where decisions are inherently complex, can be subjective, and are more likely to be associated with disagreements with managementgoodwill impairments, tax avoidance, and pro-forma reporting. Overall, our results suggest that heterogeneity in political beliefs between audit committee members and the CFO is valuable. ; Submitted version