An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jagan Krishnan
Temple University

Jong Eun Lee
Temple University

Abstract: We examine the economic determinants of firms’ choice of the “audit committee expert”, for a sample of Fortune 1000 firms. Motivated by the new SEC disclosure rule for “audit committee financial experts”, and recent market reaction studies relating to the appointment of financial experts to audit committees, we test the relation between the demand for audit committee experts with specialized accounting knowledge (“accounting financial experts”), potential litigation risk, and corporate governance. We find that firms with higher litigation risk are more likely to appoint accounting financial experts. Further, the association occurs for firms with relatively strong governance but not for those with weak governance. Our findings indicate that accounting financial expertise complements strong corporate governance, and that in good corporate governance situations, firms with higher litigation risk are more likely to appoint accounting financial experts to their audit committees.

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