Audit Committee Financial Expertise and Misappropriation of Assets

Our study extends prior literature that examines the relation between the incidence of misappropriation of assets and the effectiveness of the audit committees (Mustafa and Meier, 2006; Chapple et al., 2007). Mustafa and Meier (2006) find that the percentage of independent members and the average tenure of audit committee members significantly reduce occurrences of misappropriation of assets in publicly held companies in the United States. Chapple et al. (2007) find, also, that the proportion of independent directors on the audit committee is inversely related to occurrences of misappropriation of assets in Australian companies. While both studies draw attention to independence of audit committee members, there is no direct empirical evidence to support that the financial expertise of audit committee members will reduce the occurrences of misappropriation of assets in publicly held companies. Following Zhang et al. (2007), we classify audit committee financial expertise into two groups: accounting financial experts and non-accounting financial experts. Our study contributes to the ongoing debate surrounding the definition of a financial expert under SOX and his/her role in reducing occurrences of financial fraud (DeFond et al., 2005; Carcello et al., 2006; Dhaliwal et al., 2006; Krishnamet and Visvanathan, 2007).