Tempering Financial Reporting Risk through Board Risk Management

Mark Beasley, Allen Blay, Christina Lewellen and Michelle McAllister ()
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Mark Beasley: Department of Accounting, North Carolina State University, Raleigh, NC 27695, USA
Allen Blay: Department of Accounting, Florida State University, Tallahassee, FL 32306, USA
Christina Lewellen: Department of Accounting, North Carolina State University, Raleigh, NC 27695, USA
Michelle McAllister: Department of Accounting, Economics, and Finance, Northern Arizona University, Flagstaff, AZ 86005, USA

JRFM, 2023, vol. 16, issue 12, 1-22

Abstract: Recent corporate governance failures have heightened stakeholder expectations that the board of directors engage in robust oversight of the firm’s risk management processes. This expectation is in line with widely embraced enterprise risk management frameworks, which assert that strong board risk management is a key component of an entity’s risk management process. We use a hand-coded measure of board engagement in risk management from the recent literature to measure the robustness of that oversight for a sample of large, publicly traded U.S. firms and examine the relationship between robust board risk management (board risk management) and firm-wide strategies for mitigating financial reporting risk. While controlling for board composition-related characteristics, we found a positive association between robust board risk management processes and two avenues for mitigating financial reporting risk (i.e., more effective internal control over financial reporting and the selection of industry specialist auditors). Our results indicate that firms with more robust board risk management are associated with fewer actual instances of materially misstated financial statements and less earnings management.

Keywords: boards of directors; board risk management; internal control; corporate governance; financial reporting (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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