Gender Differences and Audit Committee Diligence

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Gender differences and auditcommittee diligence

Sheela Thiruvadi Department of Accounting, Earl G. Graves School of Business and Management,

Morgan State University, Baltimore, Maryland, USA

Abstract

Purpose – The purpose of this paper is to examine the association between the presence of femaleson the audit committee and the number of audit committee meetings.

Design/methodology/approach – This paper uses a multivariate regression model to examine theassociation between gender on the audit committee and the number of audit committee meetingsused as a proxy for audit committee diligence. The paper uses a sample of 254 firms from the S&PSmallCap600, with a December 31, 2003 fiscal year-end.

Findings – The author finds consistent evidence to show that audit committees with at least onefemale director were likely to meet more often than all-male audit committees.

Research limitations/implications – Future research suggests that it may be fruitful to examinetheeffects of gender on other aspects of audit committeeand board activities andthe interaction betweenaudit committees, management, and the external auditor. Furthermore, the results of the paper havestrongimplications for regulators andpolicy makers, since thepresence of a femaledirector on the auditcommitteemay bring manypositiveoutcomes, thereby leading to better corporate governance practices.Hence, the appointment of more females on the audit committee should be strongly emphasized.

Originality/value – This research paper contributes to the contemporary literature regarding theincreasedawareness of good outcomes associated with havingwomenon theauditcommittee in variousways. First, this research encourages the appointment of more females on the audit committee. Second,increased diligence of the audit committee leads to enhanced corporate governance practices. Third,thepresence of females on theaudit committee could lead to good corporatedecisionmaking. Fourth, the

presence of a female on the audit committee could lead to increased confidence of the public. Fifth, thisresearch also serves as an influencing power to encourage equal opportunities for both menand women.

Keywords Audit committee, Female, Meetings, Audit committee diligence, Corporate governance,Auditing, Women directors

Paper type Research paper

1. IntroductionThe Sarbanes Oxley Act (SOX) of 2002 was one of the most sweeping modernizationsof securities regulation since the enactment of the Securities Act of 1933 and theExchange Act of 1934. SOX has specific requirements relating to the composition of theaudit committees (ACs) as ACs play an important role in the financial reporting andgovernance process. The Securities and Exchange Commission (SEC) has adopted newrules related to the independence and functioning of corporate ACs (SEC, 1999a, b,2003a, b), but there has not been much focus on the issue of gender. In this paper,I develop arguments as to why I can expect differences in AC behavior due to the

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1754-2413.htm

The author sincerely thanks her dissertation advisor, Kannan Raghunandan, for his generousand wonderful guidance, dedication, support and encouragement. The author thanksAdelina Broadbridge (Editor) and two anonymous reviewers for their numerous useful commentsand suggestions. The author also thanks Kelly Carter for his timely assistance.

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Gender in Management: AnInternational JournalVol. 27 No. 6, 2012pp. 366-379q Emerald Group Publishing Limited1754-2413DOI 10.1108/17542411211269310



presence of females on the AC. I then empirically test to see if there are indeeddifferences in AC behavior due to the presence of females on the AC.

The motivation for this essay comes from the concerns by US SEC (SEC, 1999a, b,2003a, b) about the importance of the composition and activities of ACs. Private sector

commissions and large audit firms have repeatedly emphasized the need for frequentAC meetings. The National Commission on Fraudulent Financial Reporting (NCFFR,1987) recommends regular meetings of the AC as it would enable the AC to have timelydiscussions with the internal auditor, management and outside auditors. In an importantspeech, the then SEC-Chairman, Levitt (1998) recommends that an AC should holdat least 12 meetings per year in order to address the interest of the investor.The Blue Ribbon Commission on Audit Committees that was established following thespeech by Levitt (BRC, 1999a, b) recommends that ACs should hold at least four regularmeetings annually. Regular meetings between ACs, auditors and managementstrengthen their relationship and also enable them to address issues well in advance.

PricewaterhouseCoopers (PWC) (1999) states that it is necessary for ACs to holdregular meetings, as it enables review of financial statements well in advance andaddress any issues arising during the meetings. KPMG (1999) recommends at least threeto four AC meetings per year to keep the AC focused.

The absence of females in corporate boards of directors has become the focus of legislators in some countries (Waters, 2004). Nielsen and Huse (2010) show that boarddecision-making can be enhanced with the selection of women directors having differentvaluesbutwith similar professionalexperiences. There is also a growing streamof researchindicating that the presence of women could alter corporate decision-making processes.Arfken et al. (2004) use the state of Tennessee as a case study to show that there is only amoderate improvement in board diversity. There is extensive prior research in psychologyand sociology indicating that women are more risk-averse than men, and that women aremore likely to use a democratic and trust-building approach to decision-making. Bernardi

and Threadgill (2010) find that there is an association between the number of femaledirectors on a corporate board and three aspects of corporate social responsibilitynamely – charitable contributions, employee benefits and community engagement.Barber and Odean (2001) find that the stock investment traded by men is 45 percent morethan that of women. Jianakoplos and Bernasek (1998) use US sample data to examinethe differences in the financial risk-taking behavior among men and women. They findthat there is more risk-aversion in financial decision-making among single women thansingle men.

Prior studies show that women are under-represented in corporate boards (Burkeand Mattis, 2000). Women can greatly enhance board deliberations because they“provide unique perspectives, experiences, and work styles as compared to their malecounterparts” (Daily and Dalton, 2003). Huang et al. (2011) find that there are notable

positive cumulative abnormal returns with the appointment of female AC members thanmale AC members. Daily and Dalton (2003) argue that women’s “communication stylestend to be more participative and process-oriented.” Hence, the presence of at least onefemale director on the AC will likely lead to an increase in the number of AC meetingsbased on previous good outcomes of having women on the board in prior research. Thisresearch paper contributes to the contemporary literature regarding the increasedawareness of positive outcomes associated with having women on the board. Further,this research paper has implications for regulators and legislators as it recommends

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the appointment of more women on the AC since the presence of females on the ACmakes the AC more diligent. The next section of the paper provides a brief discussion onthe related literature followed by a hypothesis section. This is then followed by sectionson research method and data. Section 5 presents the results from my empirical analysis.

The paper ends with a conclusion section.

2. Related literature 2.1 AC diligenceMenon and Williams (1994) investigate the factors that are associated with meetingfrequency and the presence of insiders on the AC. Their findings show that the AC isinfluenced by board composition. The probability that the AC will meet more frequentlyincreases when there is an increase in the proportion of outside directors. McMullen andRaghunandan (1996) study the differences in meeting frequency and the composition of ACs of companies with and without financial problems. They find that there is a lowerlikelihood of the AC having solely outside directors in companies having financial

problems. Scarbrough et al. (1998) investigate if there is an association between thecomposition of ACs and their interaction with internal auditing. They find that ACsconsisting solely of non-employee directors were likely to have more frequent meetingswith the chief internal auditor. Collier and Gregory (1999) examine if firm-specific agencyfactors affect the activity of the AC in major companies in United Kingdom (UK). Theyshow that there is a positive association between AC activity and high-quality (Big 6)auditors, consistent with their agency-theoretic view of monitoring. Abbott and Parker(2000) find that a positive association exists between AC independence (consisting of non-employees) and activity (at least two meetings per year) with the engagement of anindustry specialist auditor. Abbott et al. (2000) examine if there is an association betweenfraudulent financial statements and two AC characteristics (independence and activity).Their results show that the probability of sanction by SEC is lower if the firm has an AC

that meets at least twice a year and consists of AC members who are non-employees.Beasley et al. (2000) show that fraudulent companies in the area of technology, healthcareand financial services have fewer independent boards and ACs. Further, findings showthat there are fewer AC meetings (generally one time per year) in fraud companies of technology and health care industries compared to no-fraud companies. Raghunandanet al. (2001) examine the relationship between the composition of ACs and its interactionwith internalauditing. They find that ACs having only independentdirectors with at leastone financial/accounting expertise will have longer meetings with the chief internalauditor. Archambeault and DeZoort (2001) examine if there is an association betweensuspicious auditor switching and the efficiency of AC characteristics. Their findings showthat companies with suspicious auditor switching are less likely to have frequentmeetings of the AC. Abbott et al. (2003) find a significant positive association between AC

expertise and independence with audit fees. However, they find no association betweenAC meeting frequency and audit fees. Abbott et al. (2004) find a significant negativeassociation between AC independence and meeting frequency during restatement. Songand Windram (2004) examine the efficiency of UK ACs in monitoring financial reporting.They find weak evidence that that AC financial literacy, meeting frequency and outsidedirectorships contribute to the efficiency of the AC. Gendron and Bedard (2006) show thatthe meaning of AC effectiveness is based on the reflection of processes and activitiesby attendees during AC meetings. Raghunandan and Rama (2007) examine if there is

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a relationship between firm characteristics and the number of AC meetings as a proxyfor diligence. Their results show that there is a higher frequency of AC meetings for firmsthat (1) are large, (2) have higher outside block-holding levels or (3) are in industries havinga higher probability of litigation.

In summary, prior research has examined a variety of consequences associated withAC diligence. Some studies have also examined the determinants of AC diligence.However, no study has examined the impact of gender differences on AC diligence.

3. Hypothesis developmentPrior research suggests that females are more risk-averse, less overconfident, andpossess unique perspectives, experiences, and work styles (Jianakoplos and Bernasek,1998; Barber and Odean, 2001; Daily and Dalton, 2003). Studies also show that there ismore competence, stability, independence, friendliness and emotional rationalityamong female managers than male managers (Dennis et al., 2004). Ittonen et al. (2011)show that firms have lower audit fees when there is a female chair on the AC. Similarly,there are positive abnormal returns with the appointment of female than male on theAC (Huang et al., 2011). Further, AC directors face significant reputation penalties if financial reporting problems are subsequently discovered (Srinivasan, 2005). Althoughthere are numerous prior studies on AC diligence and gender diversity on ACs, there isno study that examines the effect of gender diversity on AC diligence. Hence, thepossible loss of reputation, coupled with risk-aversion, reduced overconfidence, andgreater likelihood of compliance, suggests that ACs that have a female director will bemore diligent and have more frequent meetings. Moreover, empirical evidence fromprior research also indicates that more frequent AC meetings are associated with lowerlikelihood of fraud, SEC sanctions and suspicious auditor switching.

Along these lines, the Conference Board of Canada suggests that boards with morewomen “surpass all-male boards in their attention to risk oversight and control”

(Stephenson, 2004). I hypothesize that ACs with at least one female director would have amore deliberative and process-oriented style of functioning than all-male ACs. There aremanywaysin which a committee can be more participative,process-oriented and diligent.For example, on the quantity dimension, the meetings can be more frequent or longer; onthe quality dimension, the nature of the interaction – bothamong the committee members,as well as with others such as management, internal and external auditors – as well as thetypes of questions asked can differ. Therefore, my hypothesis is as follows:

H1. Audit committees that have at least one female director will meet more oftenthan all-male audit committees.

4. Method

I use the following model to examine the association between the presence of a femaledirector on the AC and AC meeting frequency[1]:

Log ð MEET Þ ¼b 0 þ b 1 Log ð MV Þ þ b 2OFDIRW þ b 3OTBLKW þ b 4 DA þ b 5 LOSS

þ b 6 MB þ b 7 LTGN þ b 8 FINCG þ b 9 Log ð NMEM Þ þ b 10 AUDACXP

þ b 11 NACCXP þ b 12SEPCHR þ b 13 Log ð BDSIZE Þ þ b 14 BDIND

þ b 15 Log ð BDMTG Þ þ b 16 FEMD þ 1


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The variables are defined as follows:

LogMV ¼ natural log of market value of firms as of December 31.

OFDIRW ¼ percent of shares held by officers and directors.

OTBLKW ¼ percent of shares held by outside block-holders.

DA ¼ total debt divided by total assets at year-end.

LOSS ¼ 1 if a firm had a loss for 2003, otherwise 0.

MB ¼ ratio of market value to book value as of year-end.

LTGN ¼ 1 if a firm is in any of the following sectors: pharmaceuticals(SIC codes 2833-2836), computers (3570-3577), electronics(3600-3674), retail (5200-5961), or software (7370); 0 otherwise.

FINCG ¼ 1 if the number of common shares outstanding or the long-term

debt increased by at least 10 percent, otherwise 0. LogNMEM ¼ natural log of the number of AC members.

AUDACXP ¼ proportion of directors who are accounting experts (i.e. haveexperience as a “public accountant or auditor or principalfinancial officer, controller, or principal accounting officer”).

NACCXP ¼ proportion of directors who are designated “AC financial experts”but are not accounting experts (as defined above).

SEPCHR ¼ 1 if someone other than the CEO is the chairperson of the board.

LogBDSIZE ¼ natural log of the number of board directors in 2003.

BDIND ¼ proportion of independent (not insider or gray) directors on theboard.

LogBDMTG ¼ natural log of the number of board meetings in 2003.

FEMD ¼ 1 if AC has a female director, 0 otherwise.

Log (MEET), measuring the number of annual meetings during 2003, is the dependentvariable. I use a log transformation for the number of meetings (dependent variable) sincethe dependent variable was bounded by zero and increasing in steps. I obtain data aboutthe number of meetings from proxy statements filed by firms during 2004 with the SEC.

FEMD is the independent variable of interest. I obtain data about the composition of the AC by reading all AC reports included in the proxy statements filed by the firms in

2004 with the SEC. I employ the following rules to classify directors as female. First,I examined the first name of the director (and, the photos if available) to classify theperson’s gender. If the above rule was inadequate, I then examined the vita of the directorand searched for gender identifiers, such as “Ms”, “she” or “her”.

In my analysis, I control for factors that I believe could be associated with thefrequency of AC meetings. The AC represents a monitoring mechanism, and the demandfor monitoring mechanisms varies with agency costs. Since meeting frequency is theonly publicly available signal about the diligence of the committee, I expect that ACs

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of firms with greater agency costs would be likely to have more frequent meetings.I consider four different variables for agency costs. Those four variables are discussedbelow.

Firm size is typically used as a control variable in most accounting and auditing

research, and can serve as a proxy for a variety of factors, including complexity,monitoring demands, and political costs. I include firm size (market value) as a controlfactor and expect that larger firms would have more frequent AC meetings.

Increase in managerial ownership causes a decrease in agency costs (Jensen andMeckling, 1976). DeFond (1992) finds that there is a negative correlation betweenchanges in insider ownership and changes in audit firm quality. Thus, higher levels of insider ownership can act as a substitute for a more active AC. Therefore, firms with alower level of insider stock ownership (i.e. higher agency costs) are expected to havemore frequent AC meetings.

Large shareholders have an incentive to monitor managerial behavior because of their larger investment (Shleifer and Vishny, 1997), and prior research suggests thatsuch shareholders play an important role in firmgovernance throughtheir monitoring of management (Shleifer and Vishny, 1986; Bethel et al., 1998; Bhojraj, 2003). While I expectthat large block-holders will monitor the firm more closely than other investors, I do notmake a directional prediction about the association between block-holdings andAC meeting frequency. One argument is that large block-holders will demandmore monitoring from the AC, leading to a positive association between block-holdingsand AC meeting frequency. The counter-argument is that the large investors havesufficient alternative monitoring mechanisms so that the demand for a more diligent ACwould be lower at firms with large block-holdings.

I use two control variables relating to the composition of the AC. First, I posit thatcommittees that have more members will be likely to have more frequent meetings. It islikely that as the number of members on the committee increases there will be more

questions or items that may need to be discussed, so it is likely that there will be morefrequent meetings. Second, prior studies have documented an association between ACfinancial expertise and a variety of “good” processes and outcomes, including supportfor auditors’ judgments (DeZoort, 1998), lower likelihood of suspicious auditor switches(Archambeault and DeZoort, 2001), fewer SEC enforcement actions (McMullen andRaghunandan, 1996), less earnings management (Bedard et al., 2004), and higher firmvalue (DeFond et al., 2005). I expect a positive association between the presence of ACfinancial experts and the frequency of AC meetings. I define an accounting/financeexpert as a person who is either a CPA or has experience as a chief financial officer, chief accounting officer, or controller of a for-profit corporation[2].

5. Data

My sample selection was guided by the following factors. First, AC data had to behand-collected from proxy statements; hence I wanted to keep the sample sizemanageable. Second, I wanted to concentrate on firms where the importance of the ACwould be more; hence I decided to concentrate on smaller firms since large firms arelikely to have other monitoring mechanisms, such as analyst following. Third, I wantedto see the immediate effect of SOX on AC diligence since there was strong focus on theefficiency of the AC following the collapse of Enron, WorldCom, etc. Hence, I chose the2003 year sample instead of other years. Fourth, given the changes in regulations,


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I wanted to restrict the analysis to firms with an identical fiscal year-end. Hence,I decided to restrict the analysis to firms with a December 31 fiscal year-end.

Based on the above criteria, I restrict my analysis to all non-financial firms with aDecember 31 fiscal year-end in the S&P SmallCap 600 index. Of the 600 firms in the

index, 276 are in non-financial sectors and have a December 31 fiscal year-end in 2003.An additional 22 firms did not have the required AC data (due to lack of proxy filings), somy final sample includes 254 firms. I obtain the data from firm filings with the SEC andfrom the Compustat database. Since the data was hand-collected, there was a greatlikelihood of human error. In order to overcome this problem, I had to meticulously checkthe hand-collected data to ensure its validity. Similarly, my results have to be explainedwith caution as it cannot be generalized for countries other than USA.

6. ResultsTable I provides the sample-selection process, and Table II provides descriptive dataaboutthe sample. The mean (median) market value of the firms included in my sample is

$687 ($618) million. Given that my focus is on relatively smaller firms, it is not surprisingthat officers/directors and outside block-holders hold an average of 11.73 and23.79 percent, respectively, of the shares. The average debt-to-asset ratio is 0.44, whilethe mean market-to-book ratio is 2.52. Out of the total firms, 19 percent of the firms areoperating in litigious industries, and 23 percent of the firms are having financing duringthe year. The firms had an average of 6.71 board meetings during the year.

The sample companies have, on average, 3.53 members on their ACs. While 247 of the 254 firms in my sample indicated that they had at least one AC financial expert usingthe SEC’s expanded definition, only 146 of the firms had an AC financial expert using thestricter definition used in this paper. The average number of AC financial experts usingthe SEC’s liberal definition is 1.45, but is only 0.7 when using the stricter definition forsuch an expert as in the current study.

The mean (median) number of AC meetings is 7.06 (7.0), and 247 of the 254 firmsreport having at least four meetings in 2003. These numbers are much higher than thosereported in some recent studies that have examined issues related to ACs (Abbott et al.,2003), and indicate that ACs are much more diligent in the post-SOX period than inpre-SOX period.

Only54ofthe254firmsinmysamplehaveatleastonefemaleasanACmember;47of these 54 firms have only one female AC director, while the remaining seven have twofemale AC directors. In only two of the 254 firms, women constitute a majority of theACs members.

Analysis of Spearman and Pearson correlations involving the explanatoryvariables indicates that only four of the correlations exceed 0.30, suggesting thatmulticollinearity is not likely to be a problem. This is confirmed later by VIF scores,

none of which exceeds 1.55, from my regression. Table III presents descriptive data

Firms from the S&P SmallCap 600 index 600Less: fiscal year-end other than December 31 2260Less: SIC between 6000 and 6999 264Less: missing data due to lack of proxy filings 222Total 254

Table I.Sample selection 2003

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Variable Mean SD 25th percentile Median 75th percentile

LogMV 20.17 0.63 19.77 20.25 20.60OFDIRW 11.73 11.19 4.90 8.15 14.90OTBLKW 23.79 14.30 12.40 24.40 33.20

DA 0.44 0.21 0.27 0.45 0.59 LOSS 0.19 0.39 0.00 0.00 0.00 MB 2.52 1.37 1.57 2.06 3.05 LTGN 0.19 0.40 0.00 0.00 0.00 FINCG 0.22 0.42 0.00 0.00 0.00 LnNMEM 1.24 0.20 1.10 1.10 1.39 AUDACXP 0.67 0.68 0.00 1.00 1.00 NACCXP 0.79 0.96 0.00 1.00 1.00SEPCHR 0.40 0.49 0.00 0.00 1.00

LnBDSIZE 2.06 0.22 1.95 2.08 2.20 BDIND 69.09 14.15 60.00 71.40 80.00 LnBDMTG 1.85 0.35 1.61 1.79 2.08 FEMD 0.21 0.41 0.00 0.00 0.00

Notes: The sample includes 254 observations from non-financial firms with a December 31 fiscalyear-end in the S&P SmallCap 600 index and Compustat databases; data about ACs were hand-collected from proxy statements filed with SEC; variables are defined as follows: LogMV – natural logof market value of firms as of December 31, 2003; OFDIRW – percent of shares held by officers anddirectors; OTBLKW – percent of shares held by outside block-holders; DA – total debt divided bytotal assets at year-end; LOSS – 1 if a firm had a loss for 2003, otherwise 0; MB – ratio of market valueto book value as of year-end; LTGN – 1 if a firm is in any of the following sectors: pharmaceuticals(SIC codes 2833-2836), computers (3570-3577), electronics (3600-3674), retail (5200-5961), or software(7370); 0 otherwise; FINCG – 1 if the number of common shares outstanding or the long-term debtincreased by atleast 10 percent, otherwise 0; LnNMEM – natural log of the number of AC members;

AUDACXP – proportion of directors who are accounting experts (i.e. have experience as a“public accountant or auditor or principal financial officer, controller, or principal accounting officer”);

NACCXP – proportion of directors who are designated “AC financial experts” but are not accountingexperts (as defined above); SEPCHR – 1 if someone other than the CEO is the chairperson of the board;

LnBDSIZE – natural log of the AC members in 2003; BDIND – proportion of independent (not insideror gray) directors on the board; LnBDMTG – natural log of the number of board meetings in 2003;

FEMD – 1 if AC has a female director, 0 otherwise

Table II.Descriptive statistics:

meetings sample

Number of meetings Number of companies (%)Less than 3 4 (1.6)

3 3 (1.2)4 35 (13.8)5 44 (17.3)6 27 (10.6)7 35 (13.8)8 36 (14.2)9 33 (13.0)10-12 29 (11.4).12 8 (3.1)

Table III.Descriptive data on

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on the number of AC meetings, and Tables IV and VI present univariate comparisonsbetween companies with and without a female AC director. The companies that have afemale AC director have more AC members and are larger in size. In terms of the variableof interest, the average number of meetings for ACs with and without at least one female

director is 8.06 and 6.8, respectively; the difference is statistically significant ( p , 0.01).Thus, 212 of the total 254 firms in my sample (83.4 percent) had more than four meetings.

Table V presents the regression results. The overall regression is significant( F ¼ 3.65, p , 0.001). The positive (negative) and significant coefficient on OUTBLK

FEMD ¼ 0 FEMD ¼ 1AC meetings ( n ¼ 200 firms) ( n ¼ 54 firms)

Less than 3 4 (2.0%) 0 (0%)3 3 (1.5%) 0 (0%)4 30 (15.0%) 5 (9.26%)5 38 (19.0%) 6 (11.11%)

6 20 (10.0%) 7 (12.96%)7 30 (15.0%) 5 (9.26%)8 27 (13.5%) 9 (16.67%)9 24 (12.0%) 9 (16.67%)10-12 21 (10.5%) 8 (14.81%).12 3 (1.5%) 5 (9.26%)

Notes: The sample includes 254 observations from non-financial firms with a December 31 fiscalyear-end in the S&P SmallCap 600 index and Compustat databases; data about ACs were hand-collected from proxy statements filed with SEC. 3; see Table II for definition of variables

Table IV.AC meetings with andwithout a female director

Variable Coefficient t -stat. p-value

Intercept 20.273 20.332 0.740 LogMV 0.051 1.252 0.212OFDIRW 20.004 21.680 0.094OTBLKW 0.004 2.611 0.010

DA 20.068 20.538 0.591 LOSS 20.043 20.721 0.471 MB 20.024 21.189 0.236 LTGN 0.092 1.600 0.111 FINCG 0.031 0.563 0.574 LogNMEM 0.275 1.991 0.048 AUDACXP 0.232 1.891 0.060 NACCXP 0.056 0.609 0.543SEPCHR 0.062 1.315 0.190

LogBDSIZE 0.085 0.690 0.491 BDIND 0.003 1.788 0.075 LogBDMTG 0.161 2.366 0.019 FEMD 0.096 1.725 0.086

Notes: n ¼ 248; F stat. ¼ 3.65; p , 0.001; Adj. R 2 ¼ 0.15; this table presents the results fromregression with the natural logarithm of audit meetings as the dependent variable; the sample includesall non-financial firms in the S&P SmallCap 600 with a December 31, 2003 fiscal year-end andavailable proxy data; see Table II for definition of variables

Table V.Audit meetingsregression results

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(OFFDIR) indicates that companies with a higher percentage of shares held by outsideblock-holders (insiders) are likely to have more (less) frequent AC meetings. Coming tothe audit-committee-related variables, the positive and significant coefficients forNMEM indicate that ACs are likely to meet more often when they have more members.

The coefficient on the variable of interest, FEMD, is 0.096 and significant – indicating thatACs that have at least one female director are likely to have more frequent meetings thanall-male ACs. The value of the coefficient also indicates that, on average, the presence of atleast one female director leads to a 10 percent increase in the number of AC meetings.

I performed the following sensitivity tests. I use various combinations of a dummyor continuous variable for the presence of a female director and for the presence of financial experts. Instead of the number of meetings and the number of AC members, I usethe square-root of the respective measures. I performed regressions using variouscombinations of the above variations. In each instance, the results remain substantivelysimilar – the FEMD variable continues to remainpositive andsignificant in the regression.

My sample includes:.

five firms that have an auditor change in 2003; and. ten firms audited by non-Big 4 firms.

Deleting either the firms with an auditor change, or the firms audited by a non-Big 4firm, yields similar results for all variables in my model. In addition, I checked if clientsof any particular Big 4 firm were driving the results. I add three dummy variables inthe regression for such analysis, but none of the dummy variables is significant and theinferences related to the other variables remain unchanged.

Further analysisGiven the significant changes to the accounting profession during the period fromNovember 2001 to July 2002, including the failures of Enron and Arthur Andersen as

well as the enactment of SOX, one interesting question is whether the gender effects wereprevalent before SOX. The mean (median) number of AC meetings in firms with andwithout a female director on the committee was 4.21 (4) and 4.28 (4), in 2001 and in 2003,respectively. This difference is not statistically significant[3]. I also performeda regression for fiscal year 2001 similar to the 2003 regression in Table V; in this multipleregression the FEMD variable was not significant for 2001. Thus, the results indicatethat ACs that had at least one female director reacted differently to the shocks faced bythe accounting profession in 2001-2002 (Table VI).

7. ConclusionThere has been a growing concern by US SEC about the role and function of the ACs.Moreover, there has been much emphasis on the frequency of the AC by private sector

At least one female director on ACYear Yes No

2003 8.06 (8) 6.77 (7)2001 4.21 (4) 4.28 (4)

Table VI.Mean (median) number ofAC meetings in ACs with

and without femaledirectors


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commission as regular meetings lead to good outcomes. Also, the absence of femalesin corporate boards has become the focus of legislators and regulators in manycountries, especially with women being more risk-averse and adopting a trust-buildingapproach than men as proven in prior sociology and psychology research. I hypothesize

that the presence of females would change the dynamics of the board as well as thevarious board committees.

The number of meetings represents the only publicly available signal related to thefunctioning of ACs. If women’s communication styles tend to be more participative andprocess-oriented, then it is likely that ACs that include at least one female director wouldhave more frequent meetings than all-male ACs. In this paper, I examine the relationshipbetween the presence of females on the AC and AC meeting frequency, which is used asa proxy for AC diligence. I use a sample of 254 firms from the S&P SmallCap 600. I findconsistent evidence to show that AC with at least one female director were more likely tomeet more often than all-male ACs. The finding in this paper strongly contributes to thecontemporary literature regarding the increased awareness of good outcomes associatedwith having women on the AC in various ways. Good corporate governance practices

are established when there is increased AC diligence. Also, the presence of female onthe AC leads to good corporate decision-making. In general, the presence of femaleson corporate boards has shown to bring considerable improvements in the financialquality and stability of the corporations thereby, enhancing good governance practices.The findings from this research can have the following implications. (I) one implicationof this research is to encourage the appointment of more females on the AC since femalemembers are more likely to make the AC more diligent. Diligence of the AC leads to goodoutcomes, such as lesser SEC enforcements, fewer restatements and good financialreporting quality (based on prior research). Another implication of this research is torecommend the appointment of more females on the corporate board as females alter thecorporate decision process in a positive manner. This can further enhance the confidenceof the public, especially at a time when people’s confidence in public companies hastaken a serious setback. Empirical findings in this research show that gender differenceson theAC, which lead to greater diligence,mayhave importantimplication on thequalityof the firm’s audit. My study is subject to the following limitations. First, the number of meetings is only a rough proxy for the diligence of ACs. I do not have information aboutthe length of the meetings, or about the nature of the interaction:

. among the committee members; or

. between the committee and other participants, such as management, internalauditors, and external auditors.

In theory, it is possible for an AC to have fewer meetings but be more diligent, ask moreinformed questions and have more productive meetings. Second, it is an open question

whether the observed pattern of differences would hold in countries other than theUSA. Each of the limitations noted above also represents possible avenues for futureresearch. Future research can also examine the effect of AC diligence and other gendercharacteristics.

Notes

1. This is similar to the model used by Raghunandan and Rama (2007); I add gender as anadditional explanatory variable.

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2. Section 407 of SOX (and the initial SEC rule proposal implementing that section) specifiedthat the “AC financial expert” must have “experience preparing or auditing financialstatements” butthe final SECrules changed it to “experience preparing, auditing, analyzing orevaluating financial statements” (SEC, 2003a). Thus, for example, a CEO without

significant prior accounting or finance background would qualify as an AC financial expertunder the final SEC rule but not under the original language of SOX or the initial SEC ruleproposal.

3. Note that some of the firms that had a female on the AC in 2001 did not have a female in2003, and vice-versa. Hence, we also examined the mean (median) number of meetings basedon the presence of a female on the AC in 2003. The mean (median) number of AC meetingsduring 2001 for those 54 firms that had a female director on the AC in 2003 was 4.60 (4); thecorresponding number for the 200 firms without a female director on the AC was 4.20 (4).This difference is also not statistically significant.

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About the authorSheela Thiruvadi is an Assistant Professor of Accounting at the Earl G. Graves School of Business and Management in Morgan State University. She holds a PhD in Accounting(Florida International University, USA). Her research interest covers areas in auditing, gender,outsourcing, information systems, earnings management and corporate governance. She haspublished papers in Accounting Horizons, International Journal of Public Information Systems ,Gender in Management and Information Technology Journal . Currently, she serves as a reviewerin the Afro-Asian Journal of Finance and Accounting ( AAJFA ). Sheela Thiruvadi can becontacted at: [email protected]


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Gender Differences and Audit Committee Diligence