Audit committee experts and earnings quality Sherliza Puat Nelson and Susela Devi Abstract Purpose – The purpose of this paper is to investigate the relationship between audit committee expertise and financial reporting quality. Since the Sarbanes Oxley Act, 2002, there has been growing interest in the research concerning audit committee expertise, especially as the Security Exchange Commission requires firms to identify their audit committee financial experts. Design/methodology/approach – Based on two theories, the resource dependence theory and agency theory, the study examines the association of audit committee experts with financial reporting quality, proxied by earnings management. Samples involved 2008 financial data of 300 firms that were ranked by highest market capitalisation. In total, four types of expertise are developed based on academic qualification, professional qualification and work experience. Findings – Presence of non-accounting experts and accounting experts is significant to reduce the magnitude of earnings management. Other than that, leverage and firms size are also found to be significant. Originality/value – The findings show RDT is prevalent in accounting or auditing domain, where there is evidence showing directors bridge firms with external resources such as expertise and experience. Subsequently, contribute to the mainstream accounting literature that the resource dependence theory is also vital in explaining situations where directors’ expertise and knowledge are involved. Keywords Public companies, Financial reporting, Audit committees, Experts, Resource dependence, Qualification, Earnings management, Governance, Lifelong learning Paper type Research paper Introduction Audit committees play important role in the quality and credibility of financial reporting, since they act as part of the governance mechanism to improve operations and economic profit of firms. Audit committees are important mechanism in the corporate governance (Zhang et al., 2007; Anderson et al., 2004), and have an important role ensuring the financial reporting quality (Carcello and Neal, 2000). The audit committee literature mostly focus on the audit committee effectiveness from various aspects; as a non executive director or board independence (Chen et al., 2005; Iskandar and Abdullah, 2004; Windram and Song, 2004), on responsibilities or functions (Joshi and Wakil, 2004; Gendron et al., 2004), and being a financial expert or having accounting and finance background (Engel et al., 2010; Baxter and Cotter, 2009, Mangena and Tauringana, 2008; Coates et al., 2007; Qin, 2006; Defond et al., 2005). Audit committees with financial expertise are important as they show support for auditors (DeZoort et al., 2003; DeZoort and Salterio, 2001), the credibility of the financial statement (Burrowes and Hendriks, 2005), and the high quality of reported earnings (Qin, 2006). Subsequently, market appreciates audit committee financial expertise as studies have shown an excess return of 4.6 percent in Coates et al. (2007) and a positive market reaction to the announcement of directors with accounting financial expertise (Defond et al., 2005). DOI 10.108/CG-02-2011-0009 VOL. 13 NO. 4 2013, pp. 335-351, Q Emerald Group Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 335 Sherliza Puat Nelson is based at the Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur, Malaysia. Susela Devi is based at the Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia. Received April 2010 Revised February 2011 Accepted March 2011