With many firms expanding the global scope of their operations, the appointment of foreign directors certainly appears to be a positive governance development as it enhances board diversity in terms of expertise, experiences and backgrounds. However, a potential drawback is that foreign directors also are far removed from the information networks emanating from a firm’s headquarters and main operations. In this study, we investigate how foreign directors on the audit committee perform when it comes to monitoring the decisions made by managers regarding financial reporting. We rely on the unique context provided by Canada in which companies have access to a large pool of U.S. directors, a country with which it shares many similarities and is geographically close. Results show that 45% of sample firms have at least one foreign director on the audit committee, with 78% of these firms nominating directors residing in the U.S. Firms with foreign directors on their audit committee have lower financial reporting quality, both in terms of absolute abnormal accruals and restatement. In this regard, U.S. directors play a major role as the presence of non-U.S. foreign directors does not seem to relate to financial reporting quality. Our results hold after controlling for endogeneity and alternate explanations. This finding is in contrast to studies that find that foreign directors from countries with similarities will do a better job on boards in comparison to other foreign directors.

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Publisher CIRANO
Citation
Firoozi, M, Magnan, Michel, Fortin, Steve, & Nicholls, Shane. (2016). Do Foreign Directors on Audit Committees Enhance Financial Reporting Quality?. CIRANO.