Article Critique

Article Critique

Background

The research was focused on addressing the response of the market to Audit Committee Directors’ Departures. Audit Committees are frequently seen as the most essential mechanism of corporate governance in ensuring credible financial reporting. Whereas there is a lot of literature on the relationship between various committee characteristics and the financial auditing and reporting quality, there is little research on departures of audit committee directors. Before the enactment of the Sarbanes Oxley-Act (SOX), the market reacted positively to the appointment of finance or accounting experts to the audit committee (Singhvi, Rama, & Barua, 2013). There is only one study that examined the audit committee director turnover, and; therefore, this the research focused on filling this gap by examining the issue using a sample of 107 events of audit committee director departures between years 2005 and 2008 companies. The perceptions of the market associated with audit committees can be looked at in the director departures’ context. The research sought to establish whether the reaction of the market to audit committee director departures vary depending on whether the leaving director has other board memberships or on the tenure of the departing director (Singhvi, Rama, & Barua, 2013). The research established that the reaction of the market to departures of accounting professionals is negative. This was not, however, the case with the market reaction to departures of other audit committee financial experts and non-experts.

Theory and Hypothesis

The research used previous studies to develop hypothesis upon which the study is conducted. Specifically, the question that the paper sought to answer was whether the reaction of the market to audit committee directors’ departures vary depending on whether the leaving director has other board memberships or on the tenure of the departing director. The hypotheses of the study were tested and it was revealed that there is no relationship between the market reaction to the audit committee director departure and having other board memberships.

Research Design

The research used a sample size of 107 events of audit committee director departures between years 2005 and 2008 companies. This meant that results could not be generalized. The research was started using a list of departures disclosed in Form 8-K filings with the Securities and Exchange Commission between 1st January, 2005 and 31st December, 2008 as per indications in the Audit Analytics database (Singhvi, Rama, & Barua, 2013). The initial list contained of a total of 1,932 audit committee director departures and some were eliminated to reduce the number for reasons such as duplicate observations (26), foreign firms (130), inability to find ticker symbol (950), more than one departure shown in the same 8-K filing (4), other contemporary news in 5 days of the date of 8-K filing including appointment announcements and other directors’ departures, earnings release, personnel changes, and new release and regulatory filings with the Securities and Exchange Commission (613), and death of an audit committee director (18). The remaining sample was 107 single departures of audit committees (Singhvi, Rama, & Barua, 2013).

Findings

The research established that the reaction of the market to departures of accounting professionals is negative. This was not, however, the case with the market reaction to departures of other audit committee financial experts and non-experts. The research established that the cumulative abnormal returns are considerably negative for long-tenured departures of directors. However, this is different for long-tenured departures of audit committee directors. In addition, the study established that there is no relationship between the market reaction to the audit committee director departure and having other board memberships. It was revealed that the audit committee director departures have content of information only when the outgoing director is an accounting professional (Singhvi, Rama, & Barua, 2013). The findings are consistent to earlier studies that there are variations based on the audit committee professionals types, and that the definition given by The Securities and Exchange Commission (SEC) of an ‘‘audit committee financial professional’’ may be too wide. Furthermore, the findings related to divisions based on the departure of directors’ tenure indicate that business investors see the short-tenured professional directors’ departure as an indicator of another underlying issue. The findings on board memberships imply that the benefits from various board memberships may be seen as counterbalancing issues associated with busy-boarding (Singhvi, Rama, & Barua, 2013). Descriptive statistics were used in subsamples to give offer understanding on how data was obtained and tested. The cumulative abnormal returns (CAR) were measured using an 8-day window in order to test the reaction of the market to departures of audit director. Univariate tests of differences (Wilcoxon test for medians and t-test for means were conducted to determine differences in subsamples. The average cumulative abnormal returns were used for univariate tests while the cross-sectional multivariate regressions were determined using company-specific CAR.

Implications

As stated earlier, there is a lot of literature on the relationship between various committee characteristics and the financial auditing and reporting quality, there is little research on departures of audit committee directors. This study is relevant as it helps in filling this gap, the reaction of the market towards the departures of audit committee directors. It is, therefore, relevant not only in the accounting practice, but also the business field as a whole. Even though the findings of the research cannot be generalized because of the small sample size used, it has significant implications (Singhvi, Rama, & Barua, 2013). The role that audit directors play has been subjected to increased criticism from regulators and legislators in the past few years. Acknowledging the role of the audit committee in the process of financial reporting, various sections of SOX mandate new laws and regulations on the functioning and composition of audit committees. Nonetheless, there is little research on the departure or appointment of audit committee directors. This makes the study relevant as it adds to existing knowledge.

This study is unique as it examines the reaction of the market to 107 single audit committee directors’ departures without contemporary news and concurrent appointment, and establishes that the returns of stock price are considerably negative for the accounting experts’ departure. The findings of the study are important for investors’ decisions (Singhvi, Rama, & Barua, 2013). The study examines whether the reactions of the market vary depending on the audit committee tenure length of the outgoing director and number of other board memberships that the outgoing director holds.  It establishes that the reaction is negative for short-tenured audit directors when taking into consideration the subsample. This indicates some underlying problems, and can be helpful for potential investors. The reaction does not vary depending on whether the outgoing director has other directorships, and this indicates that whereas the busy-boarding concerns may be valid, the market may perceive the importance of professionals enjoying other directorships’ benefits (Singhvi, Rama, & Barua, 2013).

 

Reference

Singhvi, M., Rama, D. V., & Barua, A. (2013). Market Reactions to Departures of Audit Committee Directors. Accounting Horizons, 27(1), 113-128.

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