Title: Do overlapping audit and compensation committee memberships contribute to better financial reporting quality? Empirical evidence for the German two-tier system

Authors: Patrick Velte

Addresses: Institute of Finance and Accounting, Leuphana University of Lueneburg, Universitaetsallee 1, 21335 Lueneburg, Germany

Abstract: Strengthening audit committee effectiveness is a key challenge from a research, regulation and corporate practice perspective. Audit committees' monitoring role in financial reporting is of great importance for shareholders and other stakeholder groups. This empirical-quantitative study examines overlapping membership in the audit and compensation committees and its impact on financial reporting quality. The analysis covers a sample of German firms listed on the 'DAX', 'TecDAX' and 'MDAX' for the business years 2010-2016 (426 firm-year observations). Correlation and regression analyses were conducted to evaluate the link between two overlapping variables and financial reporting quality. While the first overlapping variable (proportion of audit committee members who also sit on the compensation committee) contributes positively to accrual quality (as financial reporting quality), no significant results were found for the second overlapping variable (the existence of an independent financial expert as an overlapping member). The main result holds for robustness checks and has major implications in the German two-tier system.

Keywords: corporate governance; audit committee; compensation committee; financial reporting quality; overlapping membership; restatements; accruals.

DOI: 10.1504/IJEA.2017.092272

International Journal of Economics and Accounting, 2017 Vol.8 No.3/4, pp.196 - 214

Received: 04 Oct 2017
Accepted: 27 Dec 2017
Published online: 12 Jun 2018 *

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