Conducted by two accounting professors at Tilburg University in The
Netherlands, the study reinforces long-held perceptions of a clubby
culture on U.S. corporate boards, where members seldom challenge the
executives they are meant to police.
The study looked at about 2,000 U.S. companies and their board audit
committees, which are responsible for overseeing outside auditors
and making sure financial reports are accurate. It found that
personal friends of senior managers were often appointed to these
committees, making the directors more likely to go along with the
company's reporting practices.
Where that was the case, earnings manipulation was more frequent and
problems such as weak financial controls were covered up, the study
Regulations put in place over a decade ago after accounting scandals
at Enron and WorldCom required audit committees to be made up only
of independent directors. That meant they were never employed by the
company or a firm doing business with it.
Even so, audit committee members often have long-standing social
ties to executives, belonging to the same elite clubs or charity
boards, the study found.
"Although such firms appear to have independent audit committees, in
reality these committees offer little to no monitoring at all," the
The study, by accounting professors Liesbeth Bruynseels and Eddy
Cardinaels, researched social ties with BoardEx, a business
intelligence service. It appears in the January 2014 issue of the
American Accounting Association's Accounting Review.
[to top of second column]
The professors suggested that legislators consider requiring more
disclosure about social connections between audit committees and
CEOs, given the committees' importance.
Charles Elson, director of the Weinberg Center for Corporate
Governance in Newark, Delaware, said it would be difficult for
regulators to define social ties.
"Is it one lunch a week, is it two lunches? Inevitably, social ties
will develop when you're on a board — you have to see that person on
a regular basis," he said.
The United States made a major push to improve audit committees'
effectiveness with the passage of the 2002 Sarbanes-Oxley Act, which
tightened membership requirements.
More recently, regulators in Europe and the United Kingdom have been
trying to get audit committees to be more rigorous in choosing
outside auditors and monitoring them.
(Additional reporting by Huw Jones in
London; editing by Kevin Drawbaugh and Dan Grebler)
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