The Role of Firm Status in Appointments of Account

The Role of Firm Status in Appointments of Accounting Financial Experts (AFEs) to Audit Committees article review

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Firms of high status are observed to shun themselves from appointing accounting financial experts (AFEs) in their committees of auditors (Erkens & Bonner 109).

Connectively, director’s status has got a high correlation to the firm status. This is where directors with a wide base of social and corporate network are said to have a high status in the hierarchy. This status is basically derived from the director’s social attachments and corporate affiliations as well as the institutions he or she is affiliated to. From sociological and management theory, AFEs are observed to have a lower status than the appointed board members. These people may comprise of retired or current executive officers. Firms of high status are observed to decline hiring AFEs into their audit and board and indeed hiring high status directors. Their claim is that the AFEs do not have a status that matches that of their directors in order to take part in their board. Additionally, economic and social dynamics enables directors of high status to attract high status board members hence declining appointment of AFEs in those committees. Since high status directors and executive officers are deemed not to grow from the accounting field, it has been supposed that there are not many high status AFEs. This scenario hence limits appointment of AFEs in boards and committees of high status companies (Erkens & Bonner 110).

According to Erkens & Bonner (112), a mismatch of in status exists for the AFEs and the presumed status of the current directors of firms. The mismatch is great in firms of high status than low status firms. This mismatch limits appointment of AFEs in audit committees of those firms. Directors heading the operations of high status firms are more concerned with the impact appointment of AFEs in their board and committees would have on the overall status of the firm. The directors of low status firms are however not so much concerned. This has translated into a trend where many low status companies have sought services of AFEs in their audit committees than firms with high status. This scenario has forced relevant bodies and commission to compel all firms to seek services of AFEs in their audit committees to reduce financial reporting discrepancies.

In regard to the benefits of AFEs on audit committees of firms, it was highlighted that presence of financial experts resulted to positive audit results than in a case where an audit committee had not a single AFE. Firms which incorporate their audit committees with at least one accounting financial expert are deemed to have minimal fraud and restatement cases. The firms are also argued to have a better quality of accrual than those that are reluctant to hire service of AFEs. Audit committees comprising of AFEs enable the firm to win the market due maintenance of better accounting standards. Firms are constantly being urged by SEC to adapt to this measure to enhance better financial reporting results. Most firms however are reluctant in adapting to this proposal arguing that there are insufficient people with those qualifications. They argued that the pressure exerted on them to comply with regulation would force them to hire less qualified authorities such as junior auditors. Unqualified individuals lack relevant decision making expertise required in audit committees. Most firms argue that appointment of financial experts in their audit committees would not translate into an improved financial reporting structure. It was further argued…