Audit Committee Financial Expertise and Misappropriation of Assets

Our study is closely related to studies by Mustafa and Meier (2006) and Chapple et al. (2007) that examined the relation between the incidence of misappropriation of assets and the effectiveness of the audit committee (AC). While both studies drew attention to the independence of AC members, there was no empirical evidence to support or to refute the hypothesis that financial expertise has an impact on the occurrence of misappropriation of assets. Our study is the first to examine the association between the effectiveness of the AC and the occurrence of misappropriation of assets by testing the interaction between AC members' financial expertise and their independence. We find that the percentage of AC members with financial expertise is negatively and significantly related to the occurrence of misappropriation of assets in publicly held companies in the United States. The percentage of AC members who are independent and the percentage of members who are both independent members and have financial expertise are negatively and significantly related to the occurrence of misappropriation of assets. We find that the percentage of AC members who are independent and have non-financial expertise is not significantly related to the occurrence of misappropriation. The results support the notion that an independent AC member is only effective in reducing the occurrence of misappropriation of assets in publicly held companies if he/she is also a financial expert.