Audit Committee Financial Expertise and Oversight Effectiveness Evaluation

Abstract

This research introduces a novel, multi-dimensional framework for evaluating the
effectiveness of corporate audit committee oversight, moving beyond the traditional
binary classification of financial expertise. While existing literature predominantly focuses on the presence of accounting-based expertise, this study posits that oversight
effectiveness is a complex construct influenced by a confluence of cognitive diversity,
experiential depth, and dynamic interaction with management. We develop and validate a composite metric, the Oversight Effectiveness Quotient (OEQ), which integrates
quantitative measures of committee composition with qualitative assessments of process
rigor and challenge intensity. Our methodology employs a longitudinal, multi-method
approach, combining archival financial data analysis with a proprietary survey instrument administered to audit committee chairs, CFOs, and external auditors across a
sample of 150 publicly traded firms. The findings reveal a non-linear relationship between traditional measures of financial expertise and oversight outcomes, indicating
diminishing returns beyond a threshold. More significantly, we identify ’integrative
expertise’—the ability to synthesize financial, strategic, and risk perspectives—as a
stronger predictor of effective oversight than accounting proficiency alone. The results demonstrate that committees characterized by cognitive diversity and structured,
evidence-based deliberation protocols are more effective in mitigating earnings management and enhancing financial reporting quality, even when controlling for standard
measures of expertise. This research contributes a more nuanced and actionable model
for boards, regulators, and investors to assess and enhance the true oversight capacity
of audit committees, challenging the adequacy of current regulatory definitions and
highlighting the critical role of process and interaction dynamics