The effectiveness of the presence of financial expertise on the audit committee (AC) in reducing earnings management has been the subject of many previous studies with mixed findings. This paper suggests that the mixed findings may be due to prior studies not distinguishing between the genders of the financial experts on the AC. We investigate how financial expertise affects earnings management taking into account the gender of the financial expert. We use the data of a sample of 5660 US firm-year observations from 2007 to 2013 which was analysed using least squares regressions clustering by firm. The results indicate that proportion of financial expertise on the AC and gender reduces earnings management. We then group the AC financial experts by gender, and examine whether the gender of the financial expert matters. The results show that the proportion of female financial experts on the AC is significantly associated with less earnings management while the proportion of male financial experts does not significantly affect earnings management; this suggests that previous studies indicating that the presence of a financial expert on the AC may have been influenced by gender of the female financial experts. Further, our findings may also partly explain the contradictory findings of prior studies on the effect of financial expertise on the ACs effectivness.

Introduction

Audit committee (AC) plays a key role in overseeing, monitoring and advising the management of an organization in implementing internal accounting control systems and the preparation of financial statements (Arun, Almahrog, & Aribi, 2015; Bédard & Gendron, 2010; Sun, Liu, & Lan, 2011). According to Klein (2002), in their role as overseers of the firm’s financial reporting process, members of the AC meet regularly with the firm’s managers and auditors to review the corporation’s financial statements, audit process, and internal accounting controls. To improve the effectiveness of the AC following accounting scandals, such as the Enron Scandal in the US, there are now requirements in many countries for some members of the AC to have financial expertise (Badolato, Donelson, & Ege, 2014; Bédard & Gendron, 2010; Blue Ribbon Committee, 1999; General Accounting Office, 1991; Sarbanes-Oxley Act, 2002; Smith Committee, 2003).